Budget forecasting is an important tool for any business owner. Knowing where the company is going in the following year will help to make purchasing, staffing and pricing decisions. Although there are no forecasting techniques to predict the future perfectly, a budget forecast based on a clear set of variables increases the chance that the business flows in a positive direction.
Having a clear idea of where the company has profited and lost in the previous year is an important evaluator in the budget forecast process. Often companies don’t take the time to evaluate executive and departmental spending habits. Instead of looking strictly at the bottom line, a business needs to spend time each year evaluating each line item of spending to understand the cash flow better. Compare records from one, three and five prior years to get a grasp on how the variables in each year affected profits.
Look at the spending patterns of individual departments. Consider staffing costs, parts and equipment upgrades, vendors’ prices and travel and entertainment expenses. Ask each department head to evaluate the reports and submit projected budgets for the coming years based on previous experience. Small business owners should consider line item spending that includes rent, utility costs, taxes, loan interest payments and personal withdrawals.
When projecting future revenues, a business owner must take into account the state of the overall economy locally, nationally and internationally to form a realistic forecast. While entrepreneurs and corporate leaders need to maintain an optimistic view of the future, conservative financial decisions are best incorporated in the budget forecasting process. Look at peripheral industries that affect the company such as banking, the housing market and the stock market, including those industries that directly affect the company’s own products and services.
Budget forecasting software is available that can help to streamline the process. Companies such as SAS and the Satori Group have developed programs that allow business owners to input information and receive analytical reports based on the numbers. Software designed for forecasting can help make sure that every stone is turned over and helps to minimize errors. A pre-programmed guide helps to eliminate areas that often get overlooked when putting together a budget forecast.
Sometimes a third party can see the true workings of a company better than those involved in the business every day. Bring in a consultant that is experienced in the industry to help in the budgeting process. Consultants such as Consulting M.O. and Freeman Baines bring market experience and knowledge to the table and apply that information to the company’s forecast. They can read and analyze previous performance reports and apply advanced sales projection and market insight to a logical budget for future planning. Often, consultants develop and utilize proprietary software, which they can train a business to continue using.