How to Budget and Forecast for Your Small Business Effectively?
Many times it is observed that small businesses try to avoid or underestimate budgeting and forecasting processes as it involves huge costs. They rely upon opinions and guess work instead of conducting a systematic forecasting. But in reality the business is exposed to huge risk of uncertainties without having a clear picture about the future. Before going further on how to budget and forecast for your small business effectively, let us look at the meaning of budgeting and forecasting.
What is budgeting and forecasting?
Budgeting in simple terms means estimation of expenses and revenue of an organization for a specific period of time, which is normally prepared once a year. It is a financial expression of what your intentions are, and is concerned with laying out the course you are planning to take to get to the desired destination.
Forecasting is based on the analysis and observation of what is really happening out there in the business and what are the conditions that you are working around. It is the prediction of a company's financial growth in the future and its financial position. These are prepared much more frequently as compared to budgets, often done monthly to incorporate new information.
Why is budgeting and forecasting important?
A budget plan for small business helps to understand the money-making potential of a firm. It also gives an idea about the cost that may be incurred for starting up a business, whether there is a need for borrowing money, identifying the break even points, whether the firm can afford staff etc.
Forecasting enables the firm to achieve the goals. It is the future prediction of the business regarding its growth and finances. A regular forecasting will help to identify threats and challenges in advance; also it may help the business to gain first mover advantages if it identifies the potential opportunities.
How to carry out effective budgeting and forecasting for a small business?
Below are a few strategies that can be applied to create a budget for a small business and forecasting.
Always try to keep forecasts and budgets flexible. Rigid forecasts and budgets are not so useful; as the business environment is dynamic it changes rapidly along with time. If the budget and forecast cannot accommodate these changes then they may provide negative results. The decisions that are made on the basis of best guesses made months before may turn out to be costly decisions if they are not altered according to the change in business.
Clarity regarding the goals
You must have a clear idea about the goals of the firm. Forecasting helps you to predict the changes in the finances and to get an idea of the financial future of the firm. It helps to make accurate decisions keeping in mind the predictions. But if you don’t have clarity regarding the goals of the firm then your predictions may be faulty and inaccurate. You should understand the impact of auditing and forecasting and the decisions taken on the goals so that you can ensure that you are in the right direction in achieving the goals.
All round tracking
Every aspect must be considered while budgeting and forecasting is conducted. Never underestimate even minor details, such negligence may cost a lot to the firm. The details such as market trends, demand of clients, competition prevailing, client behavior etc. must be evaluated, once the budget is in its place then the forecasting must be conducted strictly to anticipate the possible scenarios.
Involvement of entire team
Forecasting and creating a budget for a small business must be considered as teamwork and all the departments must be involved so they can also understand the current picture and the future expectations of the growth. They can also provide all the required data for forecasting. Involvement of your entire team will enable you to have multiple perspectives about the business now and where it could be in future.
Try to overestimate expenses
This is a survival tactic which can be used by small businesses to hedge the risks of uncertainties. It is common that a business may face some un- anticipated cost relating to a project and the magnitude of such cost may be out of the firm’s expectations and this type of situation may trickle down small business as they have limited resources. So it is always best to overestimate the costs so that future disparities can be avoided.
Budgeting and forecasting affects every aspect of the business so it must be communicated to every individual in a firm, this will help the individuals to work accordingly to achieve the target and to gain the expected growth. It will also ensure whether the alignment is maintained between the organizational and operational strategies.
Constantly monitor your budget
Always remember that the budget won’t be static or consistent for a long period of time. The small business owners may find it difficult to cope up with the changing trends of business at an initial stage. But they must always monitor the budget to make changes in it and they can formulate appropriate financial decisions accordingly.
The above said are few strategies that can be applied to effectively create a budget for a small business and forecasting. Usually these processes are not given priority as it is tedious and intimidating but still it plays a crucial role in the business. Small businesses must always focus on the cash flow, sales and expenses when they are planning to forecast. Budgeting and forecasting both go hand in hand as forecasting predicts the future of the business and the expected growth, whereas budgeting represents how a firm can fulfill those expectations.
An effective creation of a budget for a small business and forecast can help a small business in many ways. Let us consider an example, suppose a business owner formulates a budget for his business for the coming years and according to that budget his firm may incur a cost of AED 100,000. Forecasting is also conducted in order to get a clear and holistic view of the business’s future. He always revised the budget and monitored it. After few months he realized that the cost of the business was more than the anticipated amount i.e. AED 120,000 in the budget. So he planned to cut down the cost by applying some control measures in the business. He also insisted the managers and his team to increase the revenue of the business. He again conducted a forecasting to understand the financial position of the business in future. He detected that there will be an increase in demand of the products which he used to produce; by keeping in mind this information he tried to increase the production to meet the rising demand in future. Hence, due to effective budgeting and forecasting he was able to control and face the un- anticipated financial shocks.
How can CDA help you to budget and forecast?
CDA is one of the leading accounting and auditing firms in Dubai due to its personalized and custom tailored services. CDA helps its clients to meet their financial needs by conducting thorough auditing and forecasting to help them to identify the bottleneck areas and adopt the required control procedure to tackle it. It also helps the firms by providing advice regarding the formulation of budget for the firm. CDA is always known for maintaining a strong relationship with the clients and never compromises with the quality and ethical stance of the services.