Budgeting and forecasting are methods that businesses and company executives employ to decide where the business should be headed. It is the base for a future growth plan or the next step in business. Setting a budget as KPI also helps businesses understand whether they are on the right track with their business or if they have transgressed along the way. This opens up opportunities to rectify mistakes and plan the next steps forward.
Companies can predict their future financial performance better and have an idea if they will overuse their budget. But market research by Clutch says that more than 50% of small businesses did not make a budget in 2020. But other research says that only a budgeting plan can help companies keep track of their expenses and also be aware of their financial conditions. The companies that do make an official budget also sometimes exceed it - because of under forecasting.
When the two things come together cohesively, only then can a business move forward. Read this blog to know their key differences and similarities and how these two can help your company’s growth. https://canadahustle.com talks about how businesses can use cash or accrual method of accounting.
Are you Budgeting Properly?
If employees do not know what budgeting is, then overspending beyond the company’s capacity becomes very easy. When you do budgeting, it acts like a yardstick to measure progress; without it, the whole financial system of a business can crumble.
How can you properly conduct the budgeting process to ensure your finances and employees are aligned on the same track?
Your budgeting process should ideally have inputs from all departments and business stakeholders to ensure it is a practical financial plan and not just hypothetically perfect.
Ensure that your budgeting plan has enough funds for risk management and unforeseen situations in business. That is what makes for the most practical budget. You can easily make a budgeting plan with a lot less money if you omit these.
But you will have no safety net to fall back on when unexpected situations arise. This should be a contingency for bad days and should be constant in all financial planning processes.
What is forecasting?
Forecasting is more of a future prediction for the company and its progress based on various data analysis reports. Forecasting is where company executives and accountants come together to look at the company's budget. Then they tally it with previous data and market research to predict if the company will reach its target.
When you do forecasting, if you see that the budgeting process has become unrealistic and take a closer look at all the data, you can inform your team. This makes the revaluation of the budget much easier. Forecasts can be short-term and long-term, depending on the strategy and leadership body and company goals.
What are the key differences?
The budgeting process is mostly static, and forecasting are dynamic.
Budgeting acts as a business KPI, and forecasting mostly work to predict the financial future.
The budgeting process can function individually without the forecasting part. But forecasting always needs to look at the budget to make better predictions.
Budgeting plan is for a specific period of time, whereas forecasting can be done as often as the executives decide. Forecasting can constantly keep reevaluating and analysing the budgeting plan if they feel the need.
How do budgeting and forecasting come together?
A company can still function with just a budgeting plan, even if it does not do a forecasting plan and analysis. Why? Because the budgeting process is independent and can function on its own. But when budgeting and forecasting come together, they can give much better results than budgets alone.
The budgeting process helps set the target for the company, and the forecasting give an analytical report on whether this target is viable and can at all be achieved within the set budget. Basically, forecasting brings about a reality check into budgets with its data analysis and helps makes adjustments if necessary. Budgeting and forecasting should always be considered together and built harmoniously; they should never be at loggerheads.
Do you need both, or would one suffice?
In a typical situation, the financial budget comes first and then the financial forecast. A budget can be made based on the company’s future plans and revenue they have. But a financial forecast needs to look at the budget, the previous financial data of the company, and other current market reports to understand if the budget is realistic or not.
The best forecasting plan also considers what the competitors are up to and analyzes their data, the sales data of one's own company, etc. Though forecasting is more of an ever-changing, dynamic occurrence, taking in all these extra factors can make it more concrete and give better predictions.
Long-term financial forecasting can sometimes be done without the budget, but they mostly look at old budget data to make predictions. These can sometimes become inaccurate due to changing market conditions, like the effects of suddenly rising inflation.
Technology selection in budgeting and forecasting
There is a lot of the latest technology selection in the market where that can help speed up the budgeting and forecasting process. Integrating software like Yardi in project management can help you get quick reports if you are working in the real estate industry. The system analyses all the data and generates an automated report. You no longer have to spend money and labor getting these reports if you have the right technology selection.
Budgeting and forecasting for your company with Assetsoft
At Assetsoft, we bring together the best of both worlds. We work with expert back office accountants and use the latest technology selection to speed up work and get experienced help. You do not have to pay to hire full-time accountants or buy individual software when you work with us. We will get the work done for you while you focus on other core matters of business.
To know about our services, give us a call.