If you can’t quite piece together the difference between a ‘forecast’ and a ‘budget’, you’re not alone. In fact, these are two of the most commonly confused terms in small business. They’re often thought to have the same meaning, but in actual fact, they couldn’t be further apart.
- Budget is what you want to achieve and how you predict the future will look.
- Forecast is what you will achieve and what the future will (most likely) look like.
So why are these important, and does it really matter whether you can pick the difference? The short answer is yes, and the long answer is…keep reading.
Most businesses put together a budget as part of their annual business plan. While budgets can seem important for some businesses (e.g., to compare against actual results, set spending targets, banking requirements, etc.), the results very rarely stack up. Budgets commonly include unachievable results, and/or assumptions that can become obsolete within months of setting due to external factors not considered when preparing the budget.
For example, does your budget provide visibility during turbulent times and include the following:
- Contract in size (e.g., sell business, zero or negative growth), or unexpected growth (e.g., through acquisition, higher than budgeted growth)
- Unexpected loss or gain of major customer/s
- Major changes in key economic indicators e.g., interest rates, inflation, oil prices, exchange rates
- Major competitor invades territory
Any one or combination of above can heavily skew your budget results. This is where regular forecasting can assist your business to help show you what you are likely to achieve and how to plan and strategize to counter these events.
A realistic, event driven, forecast will tell you what you need to hear, not what you want to hear. With this information, the world is your oyster. You can start making decisions based on where the business is actually positioned.
We recommend the use of a Rolling Quarterly Forecast (RQF). A RQF is updated each quarter to reflect current business conditions so that you can better understand what is on the horizon. They will generally runs for a minimum of six quarters so you can see well into the next financial year in any given forecast which is also useful for planning. The level of a detail of a RQF depends on the type of business, its industry, and current industry turbulence.
The RQF needs to look as far into the future as possible, with reasonable accuracy. It also needs to be simple enough to update. It should also focus on your main business drivers (i.e. sales volume, inventory, staffing etc.) to determine levels of income and expenses.
Implementing a RQF will assist business owners to set more realistic targets linked directly to events (unexpected or otherwise) that happen throughout the year. Give us a call and we’ll take the guesswork out of your business, and put you back in control.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.