A lot of business owners/managers will wait until the New Year is nearly upon us before they start budgeting for 2015. But with three-quarters of 2014 in the books, right now is actually a great time to start the financial forecasting process.
A forecast becomes your budget, which is an essential tool for managing throughout the entire year of any organization. It connects the overarching strategic goals to the daily operations, and the executive team to the rank-and-file employees.
Leaders of a business will make a strategic plan for the next three to five years with macro goals: add x percent growth of revenue, add or cut departments, make large capital acquisitions (such as buildings or equipment), etc. But this doesn’t always translate well to the entire team operating in their respective departments.
The budget forecasting process is the way you turn the overall plan into reality. With budget forecasting, it’s your chance to plan how to break down the implementation of goals into a month-to-month basis, or even day-to-day.
Modern accounting software packages often have the capability to house a budget, and we always recommend our clients make use of it. This makes it easier to obtain comparisons when doing the required financial reporting – which is at least as important, if not more so, than actually creating the budget itself.
Too often an organization spends the resources to create a budget, and then it sits on a shelf for the next year.
A budget projection needs to be evaluated constantly against the actual results. This allows the company to make adjustments if, for example, revenues have slipped against the forecast. It also helps spot broader changes in the marketplace, potentially highlighting the need for alterations to the strategic plan.
How much detail do you need in a budget forecast? It depends on how much the company is going to rely on it, and how they’re going to use it as an oversight tool. Whether laid out quarterly or monthly, it should match any requirements for financial reporting. Using a familiar format helps you read and understand the budget better.
We at Sponsel CPA Group have learned that if a budget is going to be successful, the management team of each subgroup must have buy-in during the forecasting process. Most departments who fail to meet their budget were not involved in preparing it. By including each team early on, they’re going to be more accountable and will strive harder to meet the benchmarks they helped set. If large capital expenditures are anticipated in the coming year, include that in the budget so it’s not overlooked by individual departments.
Be on the lookout for “budget creep.” This is the tendency to add a certain amount to a particular line item every year. A 5% bump in your marketing budget may not seem like much, but repeated annually it soon compounds into a substantial cost increase. A rise in anticipated expenditures may be warranted, but it may not – perform an evaluation to determine if the proposed figure is the right number.
Another good idea is to document the key assumptions that impact the budget during the forecasting process. That way when the lines on the chart don’t match, you can go back and reevaluate those assumptions to test their validity. It will also help identify any operational issues that might be causing revenues to falter or outlays to surge.
Sponsel CPA Group has a wealth of experience in developing budgets, tools and templates. If we can assist you in your forecasting process, whether at the nitty-gritty or strategic level, please call Eric Woodruff at (317) 613-7850 or email [email protected].