BUDGET & FORECAST PLANNING: THIS IS WHAT PROFESSIONALS DO
Published on December 15th, 2020.
WHAT ARE BUDGETS & FORECASTS?
A budget is a forward-looking view of how you expect your company to perform in the coming months. A budget is usually set once a year for a period of 12 months then regularly reviewed, and on the back of these reviews updated forecasts are produced.
Forecasts can be updated on a monthly or quarterly basis depending on the nature of your business and the resources available to complete the forecasting process.
Budgets and forecasts help with strategy formulation and future planning as well as helping align the organization around the key goals for the business. All departments should be included in the budgeting & forecasting process to ensure continued alignment around the strategy for the business.
A well thought and out and detailed budget will help in your business decision making as well as giving greater insight into all areas of your business from opportunities for growth through to key cost areas to manage and is also a tool that can be used to raise external finance, if required.
HOW DO YOU SET A BUDGET?
There are various starting points that can be used as the source of data for budgeting. Zero based is a common methodology where you review all areas of your business from the bottom up, only including revenue and costs that can be justified. Another common practice is to start with the previous year and adjust for known additions and deductions.
At the start of the process it is also worth considering how you will collate and build your budget. You can use Excel as many companies do, or you can look at online options and there are several very good online or cloud-based budgeting tools in the market.
As it is likely that you will be working with multiple people and departments when building your budget, it is useful to setup some standardized input templates to work through with your various stakeholders.
When gathering the inputs for your budget you should spend time with your key stakeholders and decision makers to determine your strategy for the coming months and ensure that the key elements of your strategy are incorporated into your budget.
Understanding your top line sales and key revenue drivers is critical to the process. You should ensure that you have a detailed breakdown of your key sales drivers and their contribution to your overall sales figure as well as understanding the expected impact of any strategic sales growth opportunities.
Similarly, understanding the cost of goods, or variable costs, associated with your revenue will help you in building a robust budget. You will also need to take time to understand the potential costs associated with any new revenue growth strategies.
Each stakeholder should have a strong understanding of the fixed costs associated with their department along with what is required to meet the agreed strategy and growth assumptions. You will need to spend time with your stakeholders working through historic costs and the projected cost base to ensure nothing is missed in the budget.
Project planning is one of the most variable parts of any budget. Spend time with your stakeholders understanding the projects that are planned for the budget period and whether those are revenue generating or infrastructure projects. It is critical to understand the overall impact of the project along with the timing of the various elements of the project.
Pay close attention to costs that are unique to your market and may not be included in a standard template. In the UAE you should ensure that, based on your employment contracts, you are calculating gratuity correctly, including costs for flights home and leave entitlements as well as factoring in visa renewal costs.
During the entire process you should look to take a prudent view on revenue so that you are not over-stating your expected income as well as taking a realistic view on all your costs. This approach will help in setting a realistic and achievable budget.
USING YOUR BUDGET ONCE IT IS SET
Once you have set and agreed your budget you should schedule time for reviews with your key stakeholders, ideally monthly. This is the opportunity for all parties to understand the key variances against the budget and to input into the ongoing forecast process.
Ensure that your reporting is inline with how your budget is structured is fundamental, otherwise you will not be able to effectively review performance against your budget. Key to reporting is ensuring that your finance team understand the various areas of the budget and can ensure costs are booked correctly and provisions are taken where required.
The budget and forecasting process should be a continuous feedback loop where you regularly review achievements against the plan and re-state accordingly. If you are continuously reviewing and updating when it comes to producing next year’s budget, you will already be part of the way there.