What are budgets and forecasts?

A common question that we are asked is 'what are budgets and forecasts?' and, in very simple terms, a budget is an estimate of what you think you will spend on costs or generate in income over a future period. Budgets are particularly useful as a cost control within a business and help to manage both expectation and managerial performance. They can also provide a very good assessment of how your sales revenue is being generated. Once you have a full understanding of where your business is currently at, you can start to plan forward using budgets to set limits on expenditure and look at how your revenue streams could rise by increasing your budgets in certain areas of the business. Overheads can be looked at to see what you’re getting for your money – what’s important is not what you spend but how you spend.

Following on from setting your budgets, you can then prepare a set of financial forecasts that incorporate Profit and Loss, Balance Sheet and Cash Flow. A forecast will show you how your business will look at given intervals over a defined future period. Most commonly a forecast will look 12 months into the future at monthly intervals so you can see exactly how your business will perform should the budgeted figures be adhered to. A forecast will also show how the structure of the business may change and can be very helpful in assessing a future valuation.

There are other assumptions that go into a set of forecasts such as when customers are likely to pay, how you pay your own suppliers, any potential recruitment of staff etc. They will also show what your likely cash requirement is for the next 12 months and are a particularly useful tool when negotiating or renewing lending facilities.

Steve has a wealth of knowledge in putting accurate financial forecasting models together that have been well received by lenders, so if you need help with budgets and forecasts for your business then get in touch now by mailing steve.bull@elitemi.co.uk.

For more information, please view our Financial Forecasting page.

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