Budgeting and forecasting
Effectively managing your business' finances is critical to your long term success. Good budgeting and financial forecasting skills can help you control the financial health of your business.
What is a budget?
A budget is a detailed statement of expected revenues and expenses. Your income will include revenues from sales, interest, accounts receivable, and any other revenue sources. Your expenses will include costs such as your payroll, inventory, and insurance.
Budgets are often based on an organization's fiscal year and then broken down by month. Reviewing your budget on a regular basis, and adjusting it as needed, will help you keep an accurate picture of your finances.
Why create a budget?
Developing good budgeting skills can help you:
- Forecast future revenues and expenses
- Identify opportunities for cost cutting
- Ensure you have enough cash on hand to cover upcoming expenses
- Determine a break-even point
- Find opportunities to be more efficient and productive
To be effective, your budget needs to be based on realistic figures and assumptions. Developing a sales forecast can help you build a comprehensive budget.
What is forecasting and why is it important?
Accurately forecasting future sales is a key part of creating a strong budget. Forecasting is not an exact science, but basing your figures on past sales and well-researched assumptions can help you realistically predict future performance.
When you are developing your forecast, you may want to look at:
- Past sales figures broken down by month
- New sales contracts and contracts that will not be renewed
- Predictions for changes in the size of your market or in the economy as a whole
If you are a new business, you will need to conduct market research and analyze the sales of similar businesses in your area.
Forecasting can help you:
- Make strategic decisions such as when to introduce a new product
- Identify the best time of year for you and your employees to take a vacation
- Calculate how profitable the boom time must be for the business to survive a slump
Financing is important to starting or growing a business. A solid budget tells investors or lenders that you have a well thought-out strategy and plan. A reasonable forecast tells them that you have researched your business strategies and are aware of the pitfalls and how to deal with them.
If you want your business to be successful, you will need to develop good budgeting and forecasting skills, or work with someone who has those skills.