Forecasting & Budgeting

Forecasting is valuable to businesses because it gives them the ability to make informed business decisions and develop data-driven strategies. Financial and operational decisions are made based on current market conditions and predictions on how the future looks.

The goal of business forecasting is to develop better strategies based on these informed predictions; helping to eliminate potential failure or losses before they happen.

The more accurate the source data, the more accurate the predictions. Yet, avoid the danger of focusing on forecast accuracy rather than business results. Business results are key.

1. Improves cash flow planning.
2. Support in raising finance/ finding funding.
3. Time-saving.
4. Reduces errors and uncertainty on future events.
5. Can influence cost and delivery performance.
6. Enhances performance, productivity and profit monitoring.
7. Helps anticipate change within the market. Become active rather than reactive.
8. Purposefully direct your company. Informs management decision-making by providing a logical basis for planning and determining in advance the nature of future business operations and facilitates correct managerial decisions about the material, personnel, sales and other requirements.
9. Proper forecasting gives companies the opportunity to better understand market dynamics, customer and market behaviour, and provide the company’s functions with useful analyses and information.
10. Assess the success of your efforts. Determine the long-term viability or value of an activity.
11. Develop benchmarks for use in future forecasts.

The challenges of business forecasting often stem from poor judgments and inexperience. Assumptions combined with unexpected events can be dangerous and result in completely inaccurate predictions. Despite the limitations of business forecasting, gaining any amount of insight into probable future trends will put an organization at an advantage.

For example, poor sales forecasting and inventory planning can have a significant negative impact on the credibility of a business. When unable to meet demand, it leads to unsatisfactory customer experience, bad press and further loss of sales down the line.

Forecasting is a technique that uses historical data as inputs to find patterns and the direction of trends. Forecasting helps management make more informed estimates, projections and predictions into the future.

Financial forecasting is the projection of financial trends and outcomes based on e.g. business drivers as well as assumptions re situational or risk factors that are likely to affect the company during the forecasted period.

1. Opinion approach, based on experts’ judgements
2. A historical approach, based on past data, experience and knowledge
3. Market testing approach, based on the testing market through surveys and research.

The forecasting required for your organization is determined by e.g. industry, market volatility, competitiveness, size, reach, etc.

• General Business Forecast.
• Sales Forecast and/ or Company’s Sales Expansion.
• Capital Forecast.
• Cash Flow Projections.
• Employee / Labour Market (Skills Availability).
• Economic Forecasts (local, national, global and/ or international).
• Political Forecasts.
• Business Longevity and Sustainability Forecast.
• Competitive Forecast (Market Share).
• Potential Risk Forecasts.

Every company manager and/ or owner would like to know how the company is actually doing, where it is going, and how feasible it is for the business to achieve its goals and objectives.

Financial forecasts are an essential part of business planning, budgeting, operations, funding — essential to help leaders and outside stakeholders make more informed choices. It also gives management valuable insights into the way the business performed in the past, and the way it is most likely to perform in the future.

Financial forecasting serves as an input for making budget allocations and developing a strategic plan. Forecasts can be short-term as well as long-term.

Cash Flow forecasts over a number of years would inform management in e.g. determining the optimal capital structure.

Forecasting is tricky in almost all industries. A business intelligence system can be used to improve forecasting.

Changing business conditions, economic uncertainty, and shifts in supply and demand can make accurate forecasting more guesswork than science.  Yet, with a business intelligence system, you can forecast with greater accuracy and precision.

Investopedia states: “Budgeting quantifies the expectation of revenues that a business wants to achieve for a future period, whereas financial forecasting estimates the amount of revenue or income that will be achieved in a future period”.

Budgeting outlines what you will spend your money on and how that spending will be financed.

A forecast is a prediction of the future whereas a budget is a planned outcome of the future – defined by your plan that your business wants to achieve.

Forecasts are developed based on past sales and expense trends, future sales contracts, trends in growth drivers, and changes in internal and external environmental factors affecting the company, e.g. changes in competition and market share.

In the case of a new company, forecasts could be prepared by tracking the past sales of competitors.

Forecasting provides a direction to the company’s strategic growth plan and helps in making strategic decisions like new product introduction, acquisitions or addressing the cyclical pattern of demand etc.

Forecasting of sales and expenses from past performance or peer performance provides the basis for developing an effective budget.

Comparing a summary budget with the most recent forecast can help management to adjust to changing business conditions and refine budgets in subsequent years.

While the budget provides management insight on what they want the company to attain, the forecast shows whether the company is able to achieve its budget or not.