Is Budgeting and Forecasting Important?

If you run a business then invariably you use some form of accounting system.  This system allows you to track revenues and expenditures as well as the capital requirements of the business.  These accounting systems also include tools for budgeting and forecasting and reporting against these budgets once prepared.

What is a budget?

Budgets are estimates of financial performance for a pre-determined period. They are usually prepared annually by companies to provide a detailed analysis of revenues to be received and monies to be spent on overheads and capital.

What are the benefits of preparing a budget or forecast?

  • It allows a business to understand its breakeven sales point.
  • Determines all the costs associated with running the business.
  • Links marketing budgets to sales activity.
  • Outlines the resources required to achieve sales and execute deliverables.
  • Allows a business to plan for growth and expansion.
  • Establishes the working capital requirements for the chosen period.
  • Provides a baseline for reporting purposes and variance analysis.
  • Ensures cash flow is available when quick decisions are required.

What factors should be taken into account when budgeting?

  • Economic data such as inflation should be factored into budget models.
  • Competition and technological developments.
  • Current year financial performance.
  • Pay increases and staff performance.
  • Resource requirements.
  • Working capital requirements.

When should budgeting take place?

Budgeting is traditionally an annual activity which can then be updated to provide revised forecasts as the period under review progresses.  The budget process should be started at least 2/3 months before the current financial period comes to an end.  Once established this budget should be uploaded to the accounting system being employed.  This will then allow actual performance to be reviewed against budgeted outcomes.

If you want to know more about budgeting and forecasting please feel free to contact the author at the email address provided below.

Steve Armitage