Budgeting & Forecasting

Budgeting & Financial Forecasting

Why do we budget and forecast?

Budgeting and Forecasting is typically a three-step process for determining and mapping out an organisation's short- and long-term financial goals. Businesses use budgeting to detail how their business plan is carried out month to month and covers items such as revenue, expenses and potential cash flow.

Giving a business an idea of how close they are to meeting or exceeding their budget goals.

Forecasting is also really important as it takes historical data and current market conditions and then makes predictions as to how much revenue an organisation can expect to bring in over the next few months or years.

Forecasts are adjusted as new information becomes available.

Our team of experts are able to call upon years of experience in the preparation of financial projections and business plans. Using our specialist software, skill and experience we can help you plan ahead and achieve your goals.

Our skilled team combined with our partnerships can help you source and obtain the most appropriate finance for you.

What is financial forecasting?

Financial forecasting is a crucial planning tool for successful business, financial forecasting helps businesses adapt to uncertainty based on predicted demand for their services or goods.

Forecasting determines what is going to happen in the future by analysing the past performance and what is currently happening. Financial forecasting is beneficial as it estimates the projected income and expenses of a business, which can help aid strategic business decisions.

The main objectives of financial forecasting

Financial forecasts are an essential part of business planning, budgeting, operations, funding — they simply help leaders and outside stakeholders make better choices.

A financial forecast is an estimate of future financial outcomes for a company, and it’s an integral part of the annual budget process. It informs major financial decisions, such as whether to fund a capital project, undertake a staffing increase or seek funding. Businesses use material information from their financial forecasts on their balance sheets and other disclosures.

A financial forecast gives businesses access to cohesive reports, allowing finance departments to establish business goals that are both realistic and feasible. It also gives management valuable insights into the way the business performed in the past and the way it will compare in the future.

Beyond informing internal fiscal controls and decisions, financial forecasts are essential in investor relations and when seeking loans. Banks and other funders weigh forecasts in their own decision-making processes.

What is a Management Buyout (MBO)?

Management Buyouts (MBOs)

Management Buyout involves a company's management team combining resources to acquire all or part of the company they manage.

A Management Buyout may offer a vendor an attractive alternative to sale to trade for a variety of reasons; for example they may feel strongly that the company and it’s staff carry on independently in what they believe to be safe hands.

A number of factors need to be considered when it comes to MBO, such as the desire and credibility of the management team buying the company, the availability of funding and the assurance of the future success of the company.

Forecasting can provide a mbo solution as it gives you the ability to present your strong financial position which can impact the decisions needed to be made to start the MBO process.

Raising Finance for Business

When raising finance, your financial model is used to help determine:

  • How much money you need
  • How and when the funding will be used
  • The value of your business

From a funder’s perspective, the financial model helps validate the financial opportunity.If you're using your financial model to raise finance, it's a good idea to have an integrated financial model. This would have a profit and loss account, balance sheet and cash flow statement. This ensures that the output of the model is in a format that funders are used to seeing. It also provides the information they need when deciding whether to fund your business.

This integrated model is also very useful for monitoring, controlling, and managing your trading performance. For many years, we have been helping businesses to successfully apply for funding to kick start growth. Find out more about raising finance for your business.

Mergers & Acquisitions 

A merger occurs when two separate entities combine forces to create a new, joint organisation. Meanwhile, an acquisition refers to the takeover of one entity by another. Mergers and acquisitions may be completed to expand a company's reach or gain market share in an attempt to create shareholder value.

Why is forecasting important for business success?

Forecasting allows you to make more informed business decisions backed with facts and data. Regular financial forecasts allow you to plan your next steps in relation to funding, operations and budgeting.

This important data can help you decide whether it’s a good time to hire new staff or fund a new project. Yet, they also provide a great insight into the past and an open source of information regarding revenue and sales performance.

Forecasting allows your company to be proactive instead of reactive.

  • Forecasting helps set goals and plans
  • Forecasting helps you budget
  • Forecasting helps anticipate change within the market
  • Forecasting helps you decide when is a good time to sell your business.

What is budgeting?

Budgeting is a process of looking at a business’ estimated incomes (the money that comes into the business from selling products and services) and expenditures (the money that goes out from paying expenses and bills) over a specific period in the future. It allows a business to see if they will be able to continue operating at their expected level with these projected incomes and expenditures.

Key characteristics of a successful budget

  • The budget should be a motivating tool
  • The budget must have the support of management
  • The budget must convey a sense of ownership
  • The budget should be flexible
  • The budget should be coordinated with other departments

What is the difference between budget and forecast?

Budgeting is the financial direction of where management wants to take the company. Financial forecasting tells the company whether they are reading in the right direction, estimating the amount of revenue and income that will need to be achieved over a period of time.

Budgeting is commonly used to compare results to determine how the results vary from what is expected. But financial forecasting is used to determine how companies should allocate their budget, but does not compare this to actual performance.

Cash Flow Management

Cash management encompasses how a company manages its operations or business activities, financial investments, and financing activities.
A company has to generate adequate cash flow from its business in order to survive, meaning it is able to cover its expenses, repay investors, and expand the business. In addition to generating cash from its activities, a business also needs to manage its cash situation so that it holds the right amount of cash to meet its immediate and long-term needs.

Advantages of cash flow forecast include:

  • You can grow your business
  • You can avoid overspending
  • You can have peace of mind
  • You can pay your staff on time
  • You wont run out of cash
  • You can display a strong financial position

How to financial forecast

  1. Gather your past financial statements. You’ll need to look at your past finances in order to project your income, cash flow, and balance.
  2. Decide how you’ll make projections. Besides past records, there’s other data you can draw on to make your projections more accurate.
  3. Prepare your pro forma statements. Pour a coffee and get ready to crunch some numbers.
  4. Forecast vs actuals- The vital second stage is to go back and record what your actual financials were in comparison to your forecast once the month or year is over.

What are the advantages and disadvantages of financial forecasting?

Forecasting isn’t easy. But when done right by experts, it can offer tremendous advantages to companies.

Advantages of financial forecasting

1. You will gain valuable insight
Forecasting allows you to create a habit of looking at real-time data which will allow you to make more informed future decisions. Forecasting allows you to anticipate demand fluctuations and react to them. It is also vital to forecast regularly to get an insight into your company’s health and provide you with an opportunity to make any adjustments if necessary.

2. You will learn from past mistakes

Forecasting gives you a starting point for the future. It is normal for your first prediction to not be as realistic as you would have hoped, however it gives you the opportunity to review where and why things didn't happen the way you predicted. This can be a powerful tool for company growth.

3. It can decrease costs

Forecasting allows you to be better able to predict what your customers want and when they want it. Therefore, giving you the opportunity to decrease excess inventory levels and increase overall profitability.

Disadvantages of financial forecasting

1. Forecasts are never 100% accurate
We all know it is hard to predict even with data, a great process and forecasting experts. That’s why we make our customers aware that forecasting will never be spot on as there are an endless number of factors that can influence demand. However, having a team of experts on your payroll is the most-effective and valuable way to predict the future of your business.

2. It can be time-consuming

One of the main factors which put business owners off performing regular forecasts is due to the time it takes. To perform a successful forecast it involves a lot of data gathering, data organizing and coordination. In order to forecast successfully and avoid wasting time and resources in-house, it is best to hire a team of professionals who have the right technology and expertise in place.

3. It can also be costly

Hiring a team of forecasting experts should be seen as a long-term investment in business growth. Your team of experts will have access to advanced software, high-quality talent and an experienced forecasting process. Which should give you confidence that you will see a return on your investment.

Starting a new business

In order to identify new opportunities and stay ahead of the competition, small businesses need to incorporate forecasting into the management process. Once they have put together projections, they can use them as a guiding principle for strategy and decision making.

Here are some of the ways forecasting can help those looking to start a new business..

  • Helps determine long-term vision
  • Establishes a pathway for achieving goals
  • Provides investors with necessary information
  • Helps identify risky opportunities
  • Helps plan and predict cash flow
  • Ability to inform employees of business success.

Need help with the budgeting and forecasting process?

Need any help with any of the above? Call our experts today who will offer the support and advice needed in of course as always a friendly manner.

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