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A reliable way for small business owners to ensure their business is profitable and operating as planned is by including a financial budgeting and forecasting process in their management tool kit. This will ensure that their business has a financial game plan (budget) for the upcoming year based on certain specific objectives and goals that need to be achieved from business operations. It’s never a good idea to start running a business without a financial plan on what needs to be accomplished and how success would be defined and measured.
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A budgeting process will enable stakeholders and managers of a business to collectively focus on all aspects of the business and layout expectations around major profit drivers such as revenues, sales, cost of goods and services, overhead expenses, labor, transportation, shipping, rent, payroll, fuel, and other big expenses that could have material impact on the bottom line for the upcoming year.
This exercise will not only ensure that all assumptions and expectations are scrubbed and debated but will also shed light on challenges that lie ahead and actions/levers that need to be engaged to better prepare and position the business to stay clear of any unwanted turbulence and to be on track to meet financial goals and objectives. This also allows for clarity and alignment on what needs to be communicated to the teams/employees, so they know what is expected of them and creates a clear path for executing the financial plan for the business.
Most often than not, things in real world keep changing and don’t go as planned. This is where forecasting comes in. Simply put, this is a process of updating the financial plan (budget) that was set at the beginning of year with new and most relevant information based on recent performance, actual data, trends, and new insights that have significant impact on bottom line.
Depending on the nature of the business, this process is conducted on a frequent basis, ranging from anywhere between once a week to once a quarter. Businesses that depend on daily sales and are most sensitive to changing conditions should do this more often, while some businesses may not need to update forecasts as often.
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As actual performance of the business becomes more visible in weeks and months after the start of the budget year, this presents an opportunity to look back and compare results versus the financial plan that was set at the beginning. As financial data is analyzed to see how various drivers of profitability such as sales, expenses, and other items have actualized, this will enable owners and managers of the business to update their financial plan (budget) with new information and trends. navigate
This may include changing sales and revenue assumptions, increasing/decreasing operating costs and other expenses, managing labor/staffing and payroll, as well as reflecting changes in transportation/shipping and such. By having an updated financial plan which is also referred to as forecast, the business owners can now be better prepared to navigate changes ahead, and handle uncertainty and risk.
Forecasting need not always be a risk management strategy, often this can also result in making changes to the business/operations to take advantage of changing market conditions to increase sales and revenues by making pricing changes due to higher demand, cutting costs by negotiating with vendors, and investing in growth due to positive economic outlook.
So, to summarize, budgeting and forecasting process will not only allow business owners to make changes as necessary to protect profits in case of downside, but also enables them to switch gears and position their business for greater profits if the opportunity arises.
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