Here’s the thing about budgeting and forecasting: both are essential to help plan for the growth of your business.
Many small business owners tend to think budgeting and forecasting are one and the same. But they’re not. In fact, each serves very different purposes. Budgeting is about laying out business goals, while forecasting is about looking at the direction the business is going in. If you want your small business to be successful, here are 5 key things you should know about budgeting and forecasting.
1. A budget is a plan. A forecast is a prediction about whether that plan will be achieved.
In a nutshell, budgeting is the plan you make to achieve specific business goals over a defined period. Forecasting helps you predict what goals will actually be achieved. In a way, you use forecasting to help with budgeting, because you consider past forecasts — or historical performance — to make an educated prediction about what you can achieve.
2. Budgeting is based on solid numbers. Forecasting is vague.
Budgeting usually involves considering number-related line items like revenue, expenses, profits and more. It could mean the amount of revenue your company has to generate or the number of units you need to sell. In comparison, forecasting is not as buttoned-down. It is often reported in estimated percentages. It’s more like a roadmap of where you predict your business to go after considering historical data, current market conditions and business factors.
3. Budgeting is usually done once a year. Forecasting can happen as often as every week.
It doesn’t make sense to continually redo budgeting as conditions change. That’s why budgeting usually only takes place once each fiscal year and rarely change. Once the budgeting time frame is complete, the actual results are compared to the initial goals to see whether the budget was realistic and whether future budgets should be adjusted. Conversely, forecasting is more fluid and often changes in response to fluctuating market and business conditions. This is why forecasting is often revisited on a weekly, monthly or quarterly basis.
4. Good budgeting involves one master plan. Good forecasting involves multiple plans.
To create more than one budget makes no sense. But to create multiple forecasts based on different scenarios or outcomes can help you plan for a range of future eventualities. In other words, your businesses can pivot more quickly by considering what might happen if “X” or “Y” comes into play.
5. Both budgeting and forecasting require flexibility.
Forecasts and budgets must be flexible since business doesn’t exist in a vacuum. Supply and demands change, market conditions fluctuate, and unexpected environmental conditions, like a pandemic, can have an effect. Your business needs to be prepared for these; continuing to make decisions using stale-dated data makes no sense. Incorporating flexibility into your budgeting and forecasting will result in more accuracy and better results in the long term.
In summary, budgeting and forecasting go hand in hand, with each serving different purposes. Budgeting helps you stay on track towards meeting your business goals within a defined period. Forecasting provides an insightful understanding of the realities your small business is facing, enabling you to take appropriate actions. It’s a yin and yang thing. For your business to be successful, you’ll need to do both.