Budgeting and Forecasting Best Practices

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Budgeting and Forecasting Best Practices

CFO Tech Outlook | Wednesday, August 04, 2021

Budgeting and forecasting are crucial to any business's success. Some key factors may help in successful budgeting and forecasting.

Fremont, CA: One of the most redeeming aspects of budgeting is that it requires the leadership of the organization to set measurable goals for the fiscal year. This is fundamentally helpful since it offers the company direction and aligns all of the employees from the top to the lowest.

These objectives are used in the budgeting process to develop a roadmap for achieving the company's objectives. While there are numerous approaches to budgeting, the resulting financial plan serves as a benchmark against which the organization's success can be measured.

Forecasting is on the other side of the aisle, and it takes the budget and turns it into a future projection. When it comes to planning for the upcoming fiscal year, forecasting is critical. Cash flow optimization is essential, especially in low-margin businesses.

Keys to successful budgeting and forecasting:

Setting realistic budget

Growing a business does not happen quickly, and those that are realistic about their financial planning should expect compounding results. A budget, however, can help with a variety of purposes other than growth. Having real, measurable, and quantifiable goals is the first step in creating a realistic budget. In this approach, the budget becomes a helpful tool for achieving meaningful results, and the forecast becomes a useful performance indicator.

Scenario planning

Unforeseen issues frequently disrupt the normal business cycle. When establishing budgets and forecasts, it is critical to explore multiple possibilities and conduct scenario analysis. One rule of thumb is to always establish a base-case budget and forecast, which is a scenario in which everything goes as planned, and then develop a set of budgets and forecasts depending on the best and worst-case scenarios.

Clean data

Bad data is one of the most common mistakes made while putting together a budget and forecast. “Terrible data in, bad data out,” as the adage goes. For their budgets, businesses should always use clean data. Because the forecast is dependent on the budget, this idea is critical. A prediction that is based on an erroneous or incomplete budget is setting the stage for disaster.

Creating a short and long-term plan

Most organizations will anticipate cash out monthly, and in some cases weekly, due to the sensitivity of keeping appropriate cash reserves. Short and long-term plans are vital because they will identify problems as they develop and enable timely solutions to prevent issues from spiraling out of control.  These plans also ensure that the company is on track to meet its goals, whether they are expanding, acquiring, or even divesting.

Regular monitoring

It's critical that once a budget is created, it doesn't just sit on a desk collecting dust. Regularly monitoring the organization's success against the budget and broader forecast is the best way to ensure that it is headed in the right path. It is a recommended practice to include common goals in your budget and projection that, when met, demonstrate that the company is on track.

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