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Budgeting And Forecasting-How They Are Different And Why Both Matter?

Most small business owners regard both budgeting and forecasting as the same thing. However, both are different. Irrespective of the size of your business, it is necessary to have an accurate forecast as both these processes enable you to achieve your financial goals. Though both these processes matter a lot, budgeting and forecasting are two completely different processes. A budget is a plan that you create to find out how you want your business to grow. While it doesn’t predict what is going to happen, it clearly outlines what you want to happen. A forecast predicts and offers a clear idea of how your finances will look like in the months to come.

What Is Budgeting?

The budget which you create is a roadmap which your business will use for reaching its goal. It shows what you want to achieve in the upcoming fiscal year and how you want to do so. Budgets are usually created annually, and they show the present financial position of your company, cash flow, and the aims by calculating the expenses and revenue required to ensure that your business is financially sound. It creates a benchmark using which you can measure how your business has progressed and its performance.

Why Budgeting Is Important?

Your budget is your business plan. It shows where you want your business to be in the next year, or in the years to come. If you don’t have a budget, you will find it difficult to measure your success. Establishing a budget and sticking to it is one way through which you can ensure that your team has invested in those areas that will help you succeed, and you are progressing towards your goals in the right way.

What Are The Best Practices Related To Budgeting?

Once you are prepared to build your project, you need to pay attention to these aspects-

Project Future Cash Flow Realistically

The revenue projections will be very useful for calculating future cash flow. But you cannot be sure that your predictions will materialize. Therefore, it would be wise to be conservative.

Calculate The Difference Between Essential And Non-Essential Expenses

Rent, electricity, and salaries are essential to run a company successfully. Travel expenses, in contrast, are non-essential expenses.

Get Rid of The Lax Approach

Ensure that your company has business some buffer when incorporating cash reserves within your budget. Having some extra cash will help if things get rough.

What Is Forecasting?

You can regard forecasting as a guide to achieve your goals. It is a guide that will enable you to reach your business goals. It offers you a data-based idea of which direction is your business heading in and enables you to prepare for the future. Your budget will be created around these predictions, enabling you to be assured that you are prepared for the challenges to come.

Why Forecasting Is Important?

A forecast is done using real-time data and enables you to make realistic predictions so that you can make wise decisions. In contrast to a budget, a forecast will help you adjust to changes. If you forecasted growth based on a large client, but things didn’t go according to your plan, you can adjust your forecast for the loss which you have incurred.

What Are The Best Practices Related To Forecasting?

Things often change quickly. Here are some steps which you can follow to be prepared for what may happen in the future-

Ensure That You Are Moving Forward

While making a forecast, you need to make sure that you are on the top and are checking with shareholders regularly and updated your forecasted spending throughout the year.

Take Into Consideration All Possible Outcomes

You can develop numerous forecasts to reflect a wide range of possibilities. From optimistic to pessimistic, prepare your business for every possible issue. Make sure that you are prepared for all types of challenges.

Conclusion

Though there are considerable differences between budgeting and forecasting, both are essential to safeguard your business interests. Therefore, make sure that you have the right tools to understand both processes clearly. In case you are confused with both these processes, then you can rely on a team of experienced accountants to streamline your business process.

By John Bugh

John Bugh is Chief Revenue Officer for Pacific Accounting and Business Services (PABS), responsible for the strategic direction, planning, vision, growth, and performance of the company’s marketing, branding, and revenue streams.

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