BUDGETING
AND
FORECASTING
GUIDE
By Beverly Davis
Founder, Davis Financial Services
www.davisfinancial.co
All businesses should engage in budgeting and forecasting to
some degree. If you’re an executive, finance or operations
manager improving the budgeting and forecasting processes
should always be a top priority.
Budgeting and forecasting helps to formulate strategies,
plan the future and align goals across the entire organization.
Both processes are crucial to a company’s growth. But even
though budgeting and forecasting are similar, there are key
differences that set them apart. It’s important to understand
these differences and prioritize what’s important, and
allocate your resources accordingly. In some company’s,
budgeting and forecasting are
separate teams to keep a clearer focus on each specific
process. To appreciate how each one contributes to
organizational success, you have to break down budgeting
and forecasting and drill into the processes and best
practices for each one.
What Is Budgeting?
Budgeting is the process of planning your company’s
revenue and expense figures for a specific period of time. It
involves identifying available cash flows and allocating
financial resources for your company’s required spending.
Budgeting allows company’s to chart your organization’s
path and assist management with strategic business
planning. The process results in a clearly defined plan that’s
reflective of your company’s financial and operational goals.
The primary characteristics of a typical budgeting process:
An annual budget, the process usually takes between
three to six months to complete.
Budgeting should start from the bottom up, and cross-
functional stakeholders should be involved in the
process. Budgeting requires detailed documentation of
all the sources and uses of cash, allowing accurate
prediction of cash flows.
Periodically compare the budget with up-to-date
financial results for real-time insight. (A variance analysis
of the actual versus budgeted income statement is a
good example of this.)
5 types of Business Budgets
1. Master budget.
A master budget is an aggregate of a
company's individual budgets designed to present a
complete picture of its financial activity and health.
2. Operating budget. An operating budget is a forecast
and analysis of projected income and expenses over the
course of a specified time period.
3. Cash flow budget. A cash flow budget projects how
and when cash flows in and out of a business within
specified time period. It can help determine whether a
company is managing cash wisely.
4. Financial budget. A financial budget represents a
company's strategy for managing its assets, cash flow,
income, and expenses
5. Static budget. A static budget is a fixed budget
thatremains unaltered regardless of changes in factors
such as sales volume or revenue.
What Is Forecasting?
Forecasting is the process of analyzing historical trends
in order to predict future results based on a company’s
most up-to-date actuals. Done over a compressed time
frame, forecasting typically focuses on major expenses
and revenue line items.
The primary characteristics of the forecasting process:
Forecasting is performed regularly after financial
statements are released, usually right after a month-end
or quarter-end close cycle.
Forecasts generally show summarized projections of.
revenue and expenses.
Key performance metrics are updated based on
forecasted numbers.
Publicly traded companies must disclose their high-level
forecasts to investors.
4 Types of Financial Forecasting
1. Sales forecasting. Sales forecasting is predicting the
amounts of products/services you expect to sell within a
projected fiscal period. There are two sales forecasting
methodologies: top-down and bottom-up.
2. Cash flow forecasting. Cash flow forecasting is
estimating the flow of cash in and out of the company
over a set fiscal period. It's based on factors such as
income and expenses.
3. Budget forecasting. Budget forecasting aims to
determine the ideal outcome of the budget, assuming
that everything proceeds as planned. It relies on the
budget's data, which relies on financial forecasting data.
4. Income forecasting. Income forecasting entails
analyzing the company's past revenue performance and
current growth rate to estimate future income.
The Benefits of Forecasting
When done efficiently and with reliable data, forecasting
gives you the insight you need to reallocate resources
proactively and help management make data-driven
decisions.
Some of the benefits of Forecasting are:
Forecasting reveals business trends that help you
determine if you need to adjust course.
It’s easier to manage cash flow and capital requirements
when informed where future expenses may fluctuate.
You can capitalize on financing and investment
opportunities when you offer investors reliable forecasts.
You can draw on your forecasted numbers as the logical
starting point for your next budget.
Budgeting and Forecasting: Key Differences
Budgeting is figuring out how much money your company will
need to spend in order to achieve its desired business
results. Forecasting, on the other hand, is about proactively
analyzing the budget and using both historical and real-time
data to predict what those business results will look like.
To be more clear, budgets are intended to be an outline of
the direction management wants to take the business,
forecasts are reports that provide a clearer indication of
where the business is actually heading and whether it’s
reaching its budgetary goals .
Ultimately, budgeting and forecasting go hand in hand, and
can be used together to optimize your company’s long-term
strategy.
Budgeting Forecasting
Projected
1–5 years Periodic Forecasts: The rest
Timeframe
of the current fiscal year.
Average
1–4 weeks (Rolling
Preparation 3–6 months
Forecasts: usually the next
Time
5 quarters or more.
External
Disclosure: Disclosed (at least for
Not Disclosed
public companies)
Less reliable later in the
More reliable because
Reliability year when the
they’re based on up-to-
numbers are outdated.
date actuals
Formulating strategies Targeted decision-making
Best Use
and business goals. in specific areas.
How To Build a Budget
Budgets should always be as thorough and as detailed
as possible. The basic business budget should include
the following information:
All planned revenue—including types of revenue,
value and when expected.
Fixed costs for your business (payroll, salaries, rent,
utilities, insurance, taxes, etc.)
Variable costs (supplies, professional services,
maintenance, etc.)
Steps To Build a Budget
1. Add income sources together to total the amount of
money coming into your business monthly. make sure to
calculate only revenue, not profit. Once you’ve identified
all of your income streams, calculate your monthly income.
It’s important to do this for multiple months — and
preferably for at least the previous 12 months, provided
you have that much data available. With 12 months of
information, you can examine how the monthly income
changes over time .
2. The second step is to add up all of your fixed costs. Fixed
costs might occur daily, weekly, monthly or even yearly, so
make sure you’re capturing them all. Once you’ve identified
your business’s fixed costs, you’ll subtract those from your
income. As you determine your fixed costs, you may come
across some variable and discretionary expenses. These
expenses should be subtracted from your income as well.
Also, you may have one-time purchases or one-off
expenses that pop up. Look ahead each month to
determine if you’ll need to set aside extra money.
3. Calculate the gross profit. Take the gross revenue and
subtract the cost of goods sold.
4. Calculate the net profit. Total up the remaining expenses
and subtract that number from your gross profit.
5. Divide and allocate the net profit. This is the body of the
budget. The different parts of the budget differ from
company to company, but some standards are; taxes,
emergency funds, expenses, investments, giving and
CEO's salary.
6. Prepare financial statements—balance sheet, income
statement and cash flow—using your budgeted numbers.
7. Identify KPIs and other performance ratios to see how the
budgeted results compare to previous years or
anticipated changes in market conditions.
8. Review the final budget and start looking at opportunities
for strategic growth (investment and divestment
opportunities, adding or reducing debt/equity, etc.)
Things To Consider When Building a Budget
Be conservative with revenue. Be sure to enter numbers
that are as accurate as possible. When planning for
revenue growth, be conservative as well, perhaps
budgeting for a 5%-10% growth for the year.
Plan for growth. When a business grows, revenue will
increase, but so will expenses, as you increase
advertising, add employees, and pay additional taxes.
Plan for unexpected expenses. One catastrophe can be
disastrous for your business, particularly if you operate
on limited cash flow.
Long-term goals. Do you plan on increasing your
customer base, renting or buying a building. Be sure to
factor that into your budget, and plan your income and
expenses accordingly.
Because budgets are prepared so far in advance and based
on a fixed set of assumptions, they can quickly become
outdated with change. This is where forecasting comes in.
Steps To Build a Financial Forecast
1.Identify the key metrics (sales volume, marketing
expenses, etc,) to focus on with your forecast.
“What are you trying to determine?”
2.Gather your latest statements and input them into
your forecast template.
3.Determine the time frame for your forecast.
(Periodic forecasts typically look ahead to the end
of the budgeted period.)
4. Choose a financial forecast method. Quantitative or
Qualitative forecasting.
5.Calculate trends based on your historical and year-
to-date actuals. Document results.
6.Apply those trend calculations to your real-time
numbers to come up with forecasted results.
Once the latest statements are confirmed, the forecasts
should be updated. This gives a clear picture of how the
business is performing against your budgeted goals.
Rolling Forecasts
Rolling forecast are generated monthly, quarterly or
weekly to help you plan for a defined period that’s beyond
the scope of the annual budget. Instead of just projecting
out to the end of the fiscal year, most rolling forecasts will
predict the next 12 months or more. Once a fiscal month or
quarter has been actualized, your
forecast just “rolls” over to the next period.
Why Rolling Forecasts Are Important:
Rolling forecasts have more reliable information about
long-term trends and performance, allowing businesses
to mitigate risk and proactively plan.
Rolling forecasts use real-time data so they stay
relevant all the time. You can tweak forecasts on
demand with up-to-the-minute numbers, which is
helpful in business environments where you might
need to pivot quickly.
By projecting out beyond the current year, rolling
forecasts ensure future budgets are strategic, well-
informed plans.
Budgeting and Forecasting Software
1. Board
2. Datarails
3.Sage Intacct
4. NetSuite
5.Mulitview ERP
6. Budgyt
7. Accrants
8. Anaplan
9. Workday
10. Planful
11.Dynamics 365
12. Solver
13. Vena
14. Jedox
15. Jirav
16. Mosaic
17.Budget Maestro
18. Prophix
19.Dynac CPM
20. Limelight
Budgeting and Forecasting In Excel
Sometimes a finance team wants to create a budget and
forecasting themselves in Excel. It's helpful that Excel has
all the necessary features and functions that allow you to
easily do this using the forecasting method.
5 Tips To Improve Your Use of Excel
1.Use file-sharing tools to make sure all collaborators are
working from the most up-to-date spreadsheet
2.Master advanced formulas and functions offered in
Excel (VLOOKUP, XLOOKUP, Pivot tables)
3. Take advantage of Excel’s automation capabilities
4.Use cloud-based data management to support Excel’s
limitations of scale and workload volume.
5.Know when your budgeting and forecasting have
outgrown Excel
Steps to Effective Budgeting and Forecasting
1. Assess Current Year-to-Date Performance
2.Examine Your Long-Range Plan
3.Align metrics to drive business forward in leap
functions versus linearly.
4.Q4 Review. In the final month of the year, update
your forecast to validate against your budget.
5.Distribute Finalized Budgets to the Business6.Make
Budgeting and Forecasting an Agile, Ongoing
Process
When companies embrace data and analytics in
conjunction with well-established planning and
forecasting best practices, they enhance strategic
decision making. Overall, these tools and practices can
save time, reduce errors, promote collaboration and
foster a more disciplined management culture that
delivers a true competitive advantage.
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Beverly Davis
Founder, Davis Financial Services
www.davisfinancial.co
