Two dirty words; budgeting and forecasting. Does the idea of creating a budget give you cold sweats? Or you’re wondering why you should do a forecast for your business? After all, weather experts get their forecast wrong all the time! Surely these two jobs are not necessary for your small business?
Sorry to burst your bubble, but budgeting and forecasting are essential. One tells you what your goals are, the other your best guess on where you’ll soon be. So come and jump on board the Mystery Machine and we’ll find out exactly what they both are!
What’s Budgeting All About?
When you work out a budget for your business, it’s your best guess at how much money your business will need and get. Both fixed expenses such as rent and variable ones such as your phone bill are predicted for the year. You then state how much you are going to pay for different things. You also need to work out what your income will be too. Your budget is something you need to stick with over 12 months.
Your budget is your plan of where your business is heading financially. It is something you use to compare against the results you actually get. This then tells you whether you are in the red or in the black. All in all, your budget helps you to manage your money.
What’s Forecasting All About?
A forecast is an estimate of where your business is heading based on your financial information. Your forecast is what you use to help you set your budget. Unlike a budget, your forecast can be updated many times based upon where your business is heading. It is mostly used for large expenses and income.
Your forecast will then tell you if you are going to need to borrow any money. Then it estimates how much you can pay back and when. It considers upcoming trends and events, based upon the past and what is happening right now.
What’s the Difference Between Budgeting and Forecasting?
Your budget will tell you what is happening over 12 months. It sets a target for the business to achieve and it is basically a plan of what is going to happen. It is done once a year.
Your forecast may break what you think is going to happen into smaller monthly or quarterly chunks. It is an expectation based upon what’s been happening. It has no target and estimates what your business will achieve. It can be done once a month.