The power of budgeting: How preparing, reviewing, and forecasting can transform your business
In the ever-evolving world of business, maintaining financial health is crucial. One of the most effective tools for achieving this is a well-prepared business budget. But simply creating a budget is just the beginning. To truly harness its power, having a team to analyse actual results and chart the impacts on the future performance of the business is crucial. This trio of budgeting, reviewing, and forecasting can provide invaluable insights and set your business on the path to sustainable growth. Let's dive into why these practices are essential and how they can benefit your business, with practical examples to illustrate their impact.
The importance of preparing a business budget
A business budget is essentially a financial roadmap. It outlines expected revenues, expenses, and profits over a specific period, typically a year. If you have specific or general business or personal wealth goals, how will you know how well you are placed to achieve those goals along the way?
Preparing a budget offers several benefits:
Financial control: A budget helps you set financial targets and limits, allowing you to control spending and avoid overspending. It acts as a guide to ensure that resources are allocated effectively.
Strategic planning: With a budget, you can plan for future growth, investments, and expenditures. It provides a framework for making informed decisions, such as launching new products or expanding into new markets.
Performance benchmarking: It sets benchmarks for performance evaluation. By comparing actual financial outcomes to the budget, you can gauge whether your business is on track or if adjustments are needed.
The benefits of reviewing actuals vs. budget
Once your budget is in place, regular review of actual performance against budgeted figures is crucial. This practice helps you:
Identify variances: Regular reviews allow you to spot variances between projected and actual figures. For instance, if your budget anticipated $100,000 in sales revenue but you only achieved $90,000, you need to investigate the reasons behind this shortfall.
Adjust strategies: By understanding why variances occur, you can adjust your strategies. If expenses in a particular area are consistently higher than budgeted, it might be time to renegotiate contracts or find cost-saving measures.
Improve accuracy: Frequent reviews refine the budgeting process. As you identify trends and anomalies, you can make more accurate forecasts and set more realistic budgets in the future.
Example: Imagine a retail business that budgets $50,000 for inventory purchases in a quarter. However, after reviewing the actuals, they find that they spent $75,000. Further investigation reveals that unexpected price increases from suppliers led to the overspend. By addressing this issue, the business can renegotiate with suppliers, adjust their forecast spend, or seek alternative sources to stay within budget in the future.
The power of future forecasting
Forecasting involves predicting future financial outcomes based on current and historical data. It extends beyond budgeting and actual reviews by helping you anticipate future financial conditions and make proactive decisions. Here’s how forecasting can benefit your business:
Proactive decision-making: Forecasting allows you to anticipate challenges and opportunities. For example, if you forecast a decline in sales due to seasonal trends, you can implement marketing strategies to boost sales during slower periods.
Resource allocation: Accurate forecasts help you allocate resources more effectively. If you expect a revenue increase, you might invest in expanding your team or upgrading equipment in anticipation of higher demand.
Risk management: Forecasting helps identify potential risks and develop strategies to mitigate them. For instance, if you foresee a potential cash flow issue, you can arrange for a line of credit in advance to ensure liquidity.
Example: Suppose your business is planning a major product launch. By analysing historical sales data and current market trends, you forecast that the launch will increase sales by 20% over the next quarter. This forecast enables you to plan for increased production, adjust your marketing strategy, and ensure you have sufficient inventory to meet the anticipated demand.
Putting it all together
Preparing a budget, reviewing actuals versus budgeted figures, and forecasting future performance are interrelated practices that provide a comprehensive approach to financial management. They help you:
Maintain control over your finances.
Make informed strategic decisions.
Identify and address variances promptly.
Plan for future growth and mitigate risks.
By integrating these practices into your business operations, you not only enhance your financial management but also position your business for long-term success. Whether you’re a small start-up or an established enterprise, leveraging the power of budgeting, reviewing, and forecasting can transform your approach to financial planning and drive your business towards its goals.
At DGF Advisory, we partner with you to assist in the budgeting process, aim to understand any seasonality and trends within your business, and to help navigate the course to where you and your business want to be in the future. Without a roadmap on how to get there, you're driving blind. Please reach out to us if you would like to find out more about our services in relation to budgeting, forecasting and ongoing advisory.
Who is DGF Advisory?
DGF Advisory are Chartered Accountants and Business Advisors, with expertise and knowledge stemming from 18 years within the public practice, being trusted Advisors to SME'S and their families from a wide range of industries.
Book a FREE Discovery session and let's chat today at dean@dgfadvisory.com.au
DGF Advisory
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