How to budget and forecast
Budgeting and forecasting are important tools to guide your business finances. But what’s the difference, and how do you get started?
What’s the difference between budgeting and forecasting?
Budgeting and forecasting often are used together, but they are two separate things used for different purposes. Budgeting can be used to set a financial goal for the company, while forecasting shows how likely you are to reach that goal. But, there is a fine line between the two.
Budgeting is the ideal expectation of how much revenue your business will generate, usually over an annual period. Your budget should include the position you want to reach with your revenue, expenses and cash flow.
Forecasting is estimating what amount of income and expenses you will generate in the future. This is done by using previous financial data to predict future results. Forecasting is usually done more regularly than creating a budget, as forecasting will be affected by any changes within the company.
How to use your budget and forecast
Budgets are used to compare with your actual financial results to see how you’re performing. By regularly comparing your revenue with your budget, you can decide where you need to take action to reach your goal.
A forecast is more short term, and gives an accurate look at what you can expect from your business in the coming months.
If you’re just starting your business, your budget and forecast will be the same. But, as your business progresses, you’ll have more data on which to accurately forecast, and bigger goals for your budget.
How to do forecasting
The first step to creating a forecast is to look at your past bookkeeping (if you have any) and use this as a guide.
Start by considering all your expenses. Usually, these are more predictable than revenue, so you will have a good idea of what you are spending on a regular basis. Be aware that advertising, marketing and legal costs can exceed expectations. Plus, some expenses, such as cost of sale will increase or decrease with your amount of sales.
If this is your first time creating a forecast for a new business, creating two sets of revenue projections can be helpful. One should be conservative, and the other of an ideal dream state. These will be based on the price point of your product, the number of estimated sales, and your ability to generate new customers through marketing and advertising.
Once you have financial data to base your forecast on, it will be easier to create a more accurate forecast.
Estimating sales growth should be based on what part of the market you can realistically reach, how likely those customers are to purchase your product, and how the market is likely to grow over time. If you have previous financial data from your company, you can look at trends in growth and be aware of any seasonality.
Finalising your forecast
To forecast your profit, deduct the expenses costs from your sales. It’s important to regularly compare your forecast to your actual finances to see where your predictions were correct, or if you need to make any adjustments.
Free accounting software to help you plan
Bokio is a free accounting software that lets you do your bookkeeping, invoicing and expenses all in one place. Doing your bookkeeping with Bokio is a great way to make sure you have the information you need to create your forecast and business budget.