Business owners and entrepreneurs often use the terms budget and forecast interchangeably — yet they have two very distinct meanings and depict financial data differently. Forecasting is a fluid concept that allows business owners to employ a dynamic view rather than a static one. Let’s detail how these two financial processes are different.
Typically, companies complete their budget process at the end of the previous fiscal year with estimations about how the upcoming year will trend. If the new budget year begins Jan 1, the budget process begins during the previous Fall. As we’ve conveyed before, the concept of having one set of steady numbers that provides a general guidepost and focus is important. However, a budget highlights the approximations from a specific point in time. As the year progresses, the budget numbers become less relevant — and the forecast numbers take precedence.
Companies should be forecasting in an ongoing cycle to determine the company’s updated goals and objectives. Comparing new results and data points to the 2020 budget is not a very helpful snapshot of performance, especially from an analytical standpoint. Instead, it is much easier to determine how to direct resources by examining the current situation and data and then forecasting ahead.
Here’s an example: when you prepared your 2020 budget, you may have assumed that you would grow your employees from 15 to 25. No one could have foreseen the pandemic and now you have eight employees. Comparing eight to 25 is not useful from a metric standpoint. In this scenario, updating the goals and objectives for the second half of 2020 to increase employees to 12 or 16 is much more fitting. In sum, the original budget information can become irrelevant.
The 14 Month Rolling Forecast
When you roll out a forecast, you always need to make assumptions. This system encourages businesses to continually update the budget and forecast for the next 14 months based on the previous 12 months. Businesses should work closely with their finance department to assess where the business is and where it’s going. Particularly now, forecasting is extremely important, especially if your business is impacted by consumer behavior (online vs. retail) or by government interventions (phased reopenings, etc.).
The pandemic certainly does not eliminate the need to have goals. While it’s a difficult time, it is important to end the year on a strong note and carry that momentum into 2021. At some point, we will move past this health crisis. The work you do now will make your company stronger in the long-run.
Glance briefly at what’s in the rearview mirror, but keep your eyes focused on the open road. It’s not how you start, but how you finish.
Takeaway: Regardless of how you prepare your budget, forecasting is a tool that outlines your company’s current performance and future success. For a free assessment of how to implement a forecasting process in your company, contact us at email@example.com.
Co-founders & Managing Partners