Budgeting and Forecasting for Business
The purpose of any budgeting or forecasting activity is to obtain a forward looking view of the business in order to facilitate resource allocation and decision making. The financial forecasts you prepare are a means to that end, not an end in themselves. You need to have this business focus in mind throughout the process.
Your starting point needs to be a strategic and operational discussion with the Board. A clear outline is needed of the plans for the business over the period in order to guide the detailed budgeting.
Without knowing what product lines are planned to be introduced or withdrawn; what facilities opened and closed; what major programmes of activity are in contemplation, preparation of a detailed financial plan is impossible.
Arising out of this discussion, you should be able to prepare an estimated ‘top down’ Profit and Loss for the period which will give you a target to aim at for the detailed budget.
Planning and organising
Once the strategic and operational guidelines are in place, you can then plan the budget process in detail. Issue a outline timetable to everyone involved.
Usually, you will start with a detailed sales forecast. You need to work closely with the sales team to define the products, customers, volumes and prices that are going to prevail.
This defines your level of activity for the purposes of building up your cost budgets.
You should then provide operational managers with raw data to build up their budgets. They will need to know the operational and strategic assumptions, inflation rates, sales volumes and data on performance in the current year. You should tightly define the format in which they send you information in order to make it as easy as possible to enter to your master budget model. You, or one of your team, should be available to support them in this exercise.
This should give you the basic information to prepare your operating profit and loss.
You then need assumptions on
· Borrowings & Interest
· Capex & disposals
· Working capital movements
· Share issues
To allow you to work up a balance sheet and cash forecast.
Ensure you leave time in the plan for your team to pull the various components together and for at least one re-working of the budget if the original version is unsatisfactory.
Tools and systems
Everyone has access to Microsoft Excel and it is possible to build very effective budget systems with this software. You need to be particularly aware of the risks of spreadsheets and the ease with which errors can creep in.
Don’t exclude the use of specialist budgeting software. Well implemented, it can dramatically reduce timescales and improve accuracy. Look for a product that allows you to control different versions of the budget and that integrates well both with Excel and your main business software.