Budgeting and Forecasting
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Frequently Asked Questions
Planning, budgeting, and forecasting are a 3 step process that differs in the timeframe they pertain to. Planning tends to extend towards the three to five year mark. Budgeting, on the other hand, details how a plan will be executed on a month to month and annual basis. Typically, companies designate a fiscal year and create a budget for that year. Finally, a forecast is an updated budget. It takes historical data, alongside market conditions, and makes a prediction regarding how much revenue and bottom line profitability an organization can expect to bring in.
When budgeting, one should first start with the strategic plan, which guides the budget process. Planning is a long-term endeavor, while budgeting tends to be annually.
The budgeting process tends to look something like this:
-It begins by looking at historical income and expenses, examining all revenue sources, and calculating your monthly income.
-Next, add up all fixed costs (ex. rent, supplies, payroll) as well as variable expenses and subtract them from your income. This will allow you to create your P&L statement.
-Once you’ve put together your P&L, which is a historical document that shows past business performance, you can move on to create your budget, which is a forward-focused document. Knowing past performance will help you estimate future performance.
There are a few challenges that are often encountered during the budgeting and forecasting processes:
-These processes are often lengthy, and outputs are sometimes delayed or even become irrelevant by the time they are presented.
-They tend to be time consuming, as it takes a great effort to gather cross-organizational data.
-Many organizations don’t use systems that allow them to see multiple views of forecasts and budgets or test the impacts of potential decisions. Accountants responsible for budgeting and forecasting spend plenty of time cross-checking information to ensure that it is correct, and often spend time chasing employees to ensure they put in the latest version of their data. And despite this, mistakes still happen. A lack of transparency regarding who did what can also serve as a hurdle, and mistakes are usually uncovered late in the game.
Corporations that wish to generate a forecast should:
-Gather actual information on the prior year’s income and expenses.
-Study the growth rate of income since you’ve been in business. If growth is expected to continue at the same rate, apply that percentage increase to next year’s numbers.
-Assess actual expense accounts and trends.
-List all of your income and expense accounts together, with income at the top and expenses below. Enter all estimated numbers for future income and expenses in the appropriate account, and list projected income and expenses for each month.
Record net income and provide a consolidated summary of the entire income or expense per account.