The term “budget forecasting” is garnering a lot of attention lately. But the term itself can cause some confusion.
While it’s not really a financial term, there are a number of industry practices that business owners could interpret as budget forecasting. Those defining it are pulling together several financial tools and processes to help us understand budget forecasting, which are all important elements to creating a complete financial picture for a company.
Understanding things like budget versus actual analysis, reforecasting and scenario planning may help to fill the gaps that business owners are trying to wrap their heads around when they think of budget forecasting.
Budget vs Actual Analysis
A budget is familiar to anyone with a bank account, and certainly to even the smallest of organizations. Planning expenses against projected income drives businesses to meet operational needs while earmarking resources to put toward company goals.
Budgets, however, are based on previous performance and assumptions. It’s uncommon for two years of a business to be exactly the same, or for every assumption to bear fruit. This is why analyzing your actual expenditures and income – a budget versus actual analysis – is important.
While budgets may be done infrequently – many companies still adhere to an annual budget plan – a budget versus actual analysis can, and should, occur more regularly so that course corrections can be made.
For those looking to understand a “budget forecast”, budget versus actual analysis may be part of the puzzle. A review of your budget’s performance will clarify where variances exist and forecast how budgets may need to change to continue to meet business needs.
Scenario planning is another process that may be misunderstood to be budget forecasting. There is a predictive element to scenario planning that could be conflated with forecasting.
Scenario planning – or “what-if” planning – models different financial potentials based on a set of assumptions. For instance, one scenario may be very similar to a company’s annual budget, leveraging previous performance and anticipated revenue to lay out a plan.
Yet another scenario could be created to illustrate financials in a “worst case” situation like if a large anticipated contract falls through, sales fall short, or production overrun cannot be sold off. A third scenario might be a “best case” version, the flip of the worst case.
The combination of these what-if scenarios could create a map forward, a kind of “budget forecast” for a company to follow.
Sometimes called “budget flexing,” reforecasting is a third budget process that may get incorrectly labeled as budget forecasting. Reforecasting goes hand in hand with budget versus actual analysis and can leverage scenario planning to keep companies on track.
In reforecasting, companies revisit their budget to adjust projected revenues and expenses. Reforecasting provides an opportunity for organizations to take advantage of a changing competitive landscape and adjust to accommodate significant divergence from an annual budget.
When combined, these processes could be seen as a type of budget forecast, despite that term being a constructed one. There are two very important takeaways from a high-level look at these three processes: First, an examination of budget versus actual analysis, scenario planning, and reforecasting make clear that these three processes can work well in concert together. And second, it’s obvious that companies looking to gain better control of their financial outlook need tools that streamline all three of these processes to make them more accessible to organizations of all sizes.
Small to mid-market organizations rely on Centage Corporation’s Maestro Suite, which includes Budget Maestro™ to help them keep track of and manage their cash flow. Budget Maestro improves the efficiency and effectiveness of business budgeting and planning, financial forecasting, financial consolidation and reporting processes. For more information, take a tour of Budget Maestro, contact Centage, or call 800-366-5111 now.