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The Ultimate Guide to Budgeting and Forecasting

December 9, 2020 |

All businesses engage in budgeting and forecasting activities to some degree—and if you’re an executive, finance leader or operations professional, improving your budgeting and forecasting processes should always be a top priority.

Budgeting and forecasting help you formulate strategies, plan for the future and align your goals across the entire organization. Both processes are crucial components of every company’s growth journey, especially during periods of change.

But even though budgeting and forecasting are similar, there are some key differences that set them apart. It’s important for finance leaders to understand these differences so you can prioritize what’s important and allocate your resources accordingly. In some cases, you might even want to assign budgeting and forecasting to separate teams so you can keep a clearer focus on each specific process.

So what is budgeting, what is forecasting and why are they both so critical? To appreciate what they are and how they contribute to organizational success, let’s unpack budgeting and forecasting and drill into challenges, best practices and major differences between them. Read on to discover:

What Is Budgeting?

Budgeting is the process of planning your company’s revenue and expense figures for a specific period of time. It involves identifying available cash flows and allocating financial resources for your company’s required spending. 

Here are the primary characteristics of a typical corporate budgeting process:

Profit and loss statement screenshot.

The Benefits of Budgeting

Budgeting allows you to chart your organization’s path and assist your management team with strategic business planning. The process results in a clearly defined plan that’s reflective of your company’s financial and operational goals. Typically prepared annually, budgets provide important guidance regarding what your business can expect to accomplish that year. 

Budgeting also has plenty of other benefits, including:

However, because budgets are prepared so far in advance and based on a fixed set of assumptions, they can quickly become outdated as soon as those assumptions change. This is where forecasting takes over—when budgeting can’t meet certain time-sensitive needs.

What is Forecasting?

Forecasting is the process of analyzing historical trends in order to predict future business results based on your company’s most up-to-date actuals. Done over a compressed time frame, forecasting typically focuses on major expenses and revenue line items. 

Here are the main characteristics of the forecasting process:

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The Benefits of Forecasting

When done efficiently and with reliable data, forecasting gives you the insight you need to reallocate resources proactively and help your managers make data-driven business decisions. There are plenty of other benefits to forecasting, including: 

Budgeting and forecasting are complementary, but they’re definitely not the same. Before we get into best practices and common challenges with budgeting and forecasting, let’s break down the key differences between them.

Budgeting vs. Forecasting: Key Differences

We already know that budgeting is figuring out how much money your company will need to spend in order to achieve its desired business results. Forecasting, on the other hand, is about proactively analyzing the budget and using both historical and real-time data to predict what those business results will look like.

Check out the table below to better understand the key differences between budgeting and forecasting:

  Budgeting Forecasting


Projected Timeframe:

1–5 years

Periodic Forecasts: The rest of the current fiscal year.

Rolling Forecasts: Usually the next 5 quarters or more.

Average Preparation Time:

3–6 months

1–4 weeks

External Disclosure:

Not Disclosed

Disclosed (at least for public companies)

Reliability:

Less reliable later in the year when the numbers are outdated.

More reliable because they’re based on up-to-date actuals.

Best Used For:

Formulating high-level strategies and business goals.

Targeted decision-making in specific areas.

Think of it this way: Your budget is your road map, highlighting key financial checkpoints for every phase of the business journey. But once that journey has started, it’s common for circumstances to change, ultimately outdating the original assumptions that were made when the budget was created. For proactive finance teams, best practices involve regularly reviewing your budget against the changing business environment, forecasting accordingly to determine where the numbers are headed, then adapting your plans as required.

How To Build a Budget

Budgets should always be as thorough and as detailed as possible. Generally speaking, your budget should include the following information:

As you build your company’s budget, it’s crucial that you follow these steps: 

  1. Review and understand all the required inputs for your budget (see above.)
  2. Analyze previous budgets and other historical data. This will help you determine your expense and revenue expectations for each fiscal month and year. 
  3. Consult with cross-functional stakeholders such as sales leaders, budget owners and C-suite executives so you can formulate the plan as a team.
  4. Determine if any capital expenditures (equipment, infrastructure, property, etc.) are required during the budgeted period.
  5. Prepare financial statements—balance sheet, income statement and cash flow—using your budgeted numbers.
  6. Identify KPIs and other performance ratios to see how the budgeted results stack up against previous years or anticipated changes in market conditions.
  7. Review the final budget and start looking at opportunities for strategic growth (investment and divestment opportunities, adding or reducing debt/equity, etc.)

How To Generate a Forecast

As you progress through your budgeted period, you should update your forecasts periodically as soon as your latest actuals are confirmed. This will give you a clearer picture of how your business is performing against your budgeted goals.

Here’s how to generate reliable financial forecasts:

  1. Identify the key metrics (sales volume, marketing expenses, etc,) you want to focus on with your forecast. Ask yourself: “What am I trying to determine here?”
  2. Gather your latest actuals and input them into your forecast template.
  3. Determine the time frame for your forecast. (Periodic forecasts typically look ahead to the end of the budgeted period.)
  4. Calculate trends based on your historical and year-to-date actuals.
  5. Apply those trend calculations to your real-time numbers to come up with forecasted results. If you know of any variables that could skew your forecast (an upcoming influx of cash, merger, geopolitical conditions, etc.) be sure to account for those when you deliver the forecast to your stakeholders.

Periodic forecasts are beneficial, but they usually only project out to the end of the current fiscal year. Rolling forecasts, on the other hand, are even more useful because they extend beyond that timeline.

Rolling Forecasts

Rolling forecasts are generated monthly, quarterly or weekly to help you plan for a defined period that’s beyond the scope of the annual budget—such as the next five quarters, for example. So instead of just projecting out to the end of the fiscal year, most rolling forecasts will predict the next 12 months or more. Once a fiscal month or quarter has been actualized, your forecast just “rolls” over to the next period so you never lose sight of your long-term business trajectory.

Rolling forecasts are important for the following reasons:

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Common Challenges With Budgeting and Forecasting

Every organization approaches budgeting and forecasting differently, with the complexity and scope of your processes determined by your company’s size, structure and industry. But budgeting and forecasting challenges can persist for any finance team—and the first step toward solving them is recognizing what those challenges are. 

Here are some common challenges that might be holding back your budgeting and forecasting efforts:

Disparate and Disconnected Data Sources

According to the 2020 Vena Industry Benchmark Report, data silos are a challenge for 57% of finance teams. If you’re spending too much time wrangling numbers from your ERP, CRM, HRIS and other data sources, you won’t be able to analyze the story those numbers are telling you.

This slows down the budgeting and forecasting cycle and makes it harder to plan proactively when business conditions change. Data silos also make it difficult to collaborate with cross-functional stakeholders, leading to unreliable budgets and forecasts that don’t capture a holistic view of your business.

Manual Processes in Excel

The 2020 Pulse of Performance Management Survey revealed that 82% of finance teams still use offline Excel spreadsheets for budgeting, forecasting and other core FP&A activities. But the same poll also found that 54% of the Excel faithful aren’t happy with their spreadsheet processes—saying they’re too labour intensive, they take too long to complete and they’re difficult to manage across the entire business.

It’s clear that finance teams everywhere are comfortable and familiar with Excel. But once your organization reaches a certain level of maturity, offline spreadsheets won’t have the processing power for advanced budgeting and forecasting. Using Excel alone to manage your budgets and forecasts can lead to version control issues, data integrity problems and formula errors from keying in numbers manually. Ever had a template crash when you’re pushing towards a deadline? (Because that’s what often happens when you treat Excel like a database.)

 

No Workflows, Audit Trails or Data Validation Measures

Budgets and forecasts have a lot of moving parts, which means keeping your contributors aligned is a pretty important job. But if you’re searching your inbox for template files, chasing down colleagues for numbers and constantly losing sleep over whether your data is accurate, it’s tough to keep track of your progress and maintain a healthy work-life balance—especially when you’re spinning over “final” budget version 14.1-a.

That’s why you need to have workflows, audit trails and data validation measures in place. Confident budgeting and forecasting is a whole lot harder without them.

How A Complete Planning Solution Makes Budgeting and Forecasting Easier

According to this report from Deloitte, emerging technologies are reimagining the future of finance—and the teams that don’t embrace this evolution risk falling behind the eight ball. For budgeting and forecasting in particular, a complete planning solution can help you get ahead by making your processes faster, easier and more reliable. Read on to find out how.

They Automate Manual Data Entries So You Can Spend More Time on Analysis

A complete planning solution leverages both relational and OLAP cube database structures so you can bring all your financial information into one source of truth in the cloud. By integrating directly with your ERP, CRM, HRIS and other source systems, you won’t have to input numbers manually while building budgets or generating forecasts. Instead, the cells in your templates would be mapped right back to your data sources so the values just flow in automatically whenever you need to refresh them. 

Here are some other benefits of automated data entries for budgeting and forecasting:

With all that time saved, you won’t have to waste days wrangling data for budgets and forecasts. Instead, you’ll be able to focus on what really matters: Planning for the future of your business.

They’re Flexible and Easy To Use So You Can Drive Teamwork and Transparency Across Your Business

According to the 2020 Pulse of Performance management survey, ease of use is the most important feature for a budgeting and forecasting solution to have. Automations certainly help with usability, but your software still won’t get used if it's clunky and difficult to manage. In order to keep cross-functional stakeholders involved in your budgeting and forecasting processes, you need to choose a solution that’s flexible and accessible for everyone.

Here’s how a complete planning solution fits the bill:

They Give You Room to Grow With Scenario Modeling, Dashboards and More

If your business is always evolving, your budgets and forecasts are evolving too. However, if you don’t have the ability to level-up your processes as you grow, you’ll have a hard time adapting to the ever-changing needs of your organization. 

A complete planning solution makes it easy to facilitate growth with a range of enterprise-grade features that complement budgeting and forecasting, such as:

Your budgeting and forecasting processes might not require all these features right away, but growing with a complete planning solution makes it easy to leverage them when you need to.

Recap
The Ultimate Guide To Budgeting and Forecasting
  • Budgeting is the process of planning your company’s revenue and expenses for a clearly defined period (typically 1 year.)
  • Budgeting is how you set goals for your organization and lay the foundation for long-term success.
  • Forecasting is the process of analyzing historical trends in order to predict future business results based on your company’s most up-to-date actuals.
  • Forecasts illustrate how your business is performing against your budgeted targets.
  • Rolling forecasts allow you to gauge your long-term business trajectory beyond the scope of your budget.
  • Budgeting and forecasting should both be thorough, collaborative. 
  • Complete planning solutions make budgeting and forecasting easier by streamlining manual processes, facilitating ease-of-use and offering supporting features like scenario modeling, dashboarding and more.

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