Budget Forecasting: What It Is and How to Do It

What is Budget Forecasting?

Budget forecasting is a confusing term for many people because it combines multiple financial tools. It is essentially a combination of a budget and a financial forecast—it uses a budget to create a plan for the upcoming fiscal year using historical business data. 

What is a Budget?

A budget is a spending plan for your business based on your projected income, expenses, and cash flow for the upcoming year. A budget helps you understand how much money you have and how much you’ve spent. 

A budget can help you make important financial decisions in your business, like whether you need to cut your expenses or have the funds to buy new equipment. And a detailed budget can make it easier to obtain a loan from a bank or financial institution. 

Your business budget should include the following components:

• Estimated revenue: The estimated revenue is the amount of money you expect to bring in from the sale of your products or services. The easiest way to figure out your estimated revenue is by multiplying the expected number of sales by the average sales price. 
• Expenses: Your budget should also account for any expenses in your business. Spend some time thinking about the fixed and variable costs your business typically incurs throughout the year. It’s also important to account for the occasional one-time expenses, like replacing equipment.
• Cash flow: The cash flow is the amount of money being transferred in and out of your business. You want to track your cash inflow and cash outflow, as this will affect liquidity.
• Profit: Your profit is the amount of money your business gets to keep after all its expenses are paid. If the profit is increasing year over year, that means your business is growing. 

What is a Forecast?

A financial forecast is a high-level projection of expected business outcomes based on existing data. A comprehensive forecast looks beyond the factors directly impacting your business and considers other factors as well, like social and economic influences.

A budget is typically a short-term projection, but a financial forecast can be used for short-term and long-term projections. It typically includes the following information:

• The current and expected revenue
• Information about fixed, variable, and one-off expenses
• A financial projection of the company’s expected growth

Budget vs. Budget Forecasting: What’s the Difference?

There are similarities between a budget and budget forecasting, but they aren’t the same. A budget outlines the direction a company would like to go, while a budget forecast shows whether the business is actually headed in that direction. 

And while a budget is typically done once a year, a budget forecast is updated monthly or quarterly. And unlike a budget, budget forecasting doesn’t account for any variance between the budget and actual performance. 

The most significant difference between these two strategies is that a budget is typically created to help a business meet a goal. It’s a static financial document that outlines a company’s projections for the upcoming year.

In comparison, a budget forecast aims to predict the outcome of a budget. It’s adjustable and can change over time as your business’ needs and expectations change.

How to Make a Budget Forecast

A budget forecast predicts the expected outcome of a budget for the upcoming fiscal year. It uses past sales data to create a short-term estimate of the company’s financial goals. Let’s look at the steps you can take to create a budget forecast for your business. 

Gather Your Company’s Data

The first step is to gather your company’s past and current financial data. List out any information about the sales revenue and expense history. Once this information is listed out in a formal document, you’ll have a better idea of what your future earnings and expenses will be. 

Decide on the Time Frame

Next, you need to determine the time frame you’re looking to measure. For instance, do you want to review the budget forecast monthly, quarterly, or annually? 

Set Your Expected Revenue

Once you have a good understanding of your company’s financial data, you can project your expected revenue for the coming year. It’s a good idea to underestimate your revenue expectations and set this as your baseline goal. Don’t forget to include any additional streams of income, like investments or stock shares.

Project Your Expenses

Now you’re going to project your fixed, variable, and one-off expenses for the coming fiscal year. This can include things like operating expenses, cost of goods sold, and loan payments. It’s a good idea to overestimate your expenses—look at your average spending over the past few years and set your budget forecast based on the higher end of those averages.

Conclusion

A budget forecast is a valuable tool that businesses can use to set financial expectations for the coming year. But creating a budget forecast can be challenging, and it requires that you have a solid understanding of your company’s data.

If your historical data is inaccurate, your budget forecast will be wrong as well. That’s why it’s a good idea to use forecasting software to develop your budget forecast. 

The right forecasting software will make it easier to track your cash flow, understand where your money is going, and identify trends in your business. That way, you’ll always understand how your business is performing and what you should focus on.