Budgeting & Forecasting: Creating A Roadmap For Success

Nov 17, 2015

Transportation_Road30Like most organizations, you are probably putting the finishing touches on your 2016 budget. There are a number of budgeting techniques, and I would imagine at one time or another you have utilized all of them. These methods include same as last year (SALY), zero-based budgeting, percent increase over last year, etc. Which of these systems do you currently apply. If your manager asked you to do a forecast, how would you respond?

  1. I have already outlined a budget, I am not doing anything else
  2. A budget and a forecast are one in the same
  3. Sure I’ll get right on it!

You may not be as forceful as the first bullet, or as enthusiastic as the last, but I would imagine you would respond in some fashion similar to these points. And if you did, you would be somewhat correct. In order to understand the reasoning, we need to define the difference between a forecast and a budget.

A budget is:

  • A detailed representation of what you expect the future to be and goals to achieve
  • Generally prepared and updated once a year
  • Serves as a starting point to compare actual results to, i.e. a variance
  • a live document which management holds departments accountable to and attempts to achieve the goals it outlines
  • It is not a pie in the sky guess as to where you hope to be

A forecast is:

  • Typically less detailed with just major revenue and expense items
  • Typically does not cover financial position other than cash flow
  • Can be updated frequently, quarterly or even monthly
  • Goals are tracked, but actual results are rarely compared back to the forecast
  • Management typically does not hold employees accountable to the forecast
  • Is based on historic trends and future contracts

In a nutshell, a budget is a picture of where the company currently stands. A forecast is where you hope to be and prediction as to where you are going. Both are valuable tools You can build a forecast from a budget, and try to work backwards. A budget tends to be more expected and a forecast is slightly more hopeful. Although, if you expect sales to increase by 15% as your forecast predicts, you may want to set your budget with a 15% sales increase, or with an increase of revenue. Consistently having positive variances in sales numbers is not always a good thing. Sure it may make the sales team look good, but there are capacity issues and other costs. For example, overtime may come into play with increased sales. You may not plan for such in your budget. It is essential to be realistic about your budget but also employ your forecast as a tool to anticipate possible issues, both positive and negative, in the future.

It can be cumbersome to do a budget and the thought of doing a forecast on top of it may seem ridiculous, but it could be the most valuable time you spend if done correctly and utilized fully.

Categories: Cost Accounting