How to improve budgeting and forecasting is an important factor in company success. Successful companies are mostly determined by net income. Correct budgeting and forecasting will give the company the desired net income or even more. Failure to do so will result in low income or a net loss. Knowing the future expenses will hint at how much income is needed. When income is met then the budget will be paid. Moreover, the company will get the desired net income. That is why companies are constantly searching for ways to improve budgeting and forecasting.
Guide on How to Improve Budgeting and Forecasting
How to improve budgeting?
1.) Spending should be within the budget
Companies should spend within the budget. This means monitoring cash advances. Controlling the cash advances will give good track of expenses. Companies usually establish a cash advances protocol. The procedure is all expenses should undergo cash advances. Then, propose cash advances will go to the budgeting department for endorsement. After that, the endorsed cash advance will be approved by the approving authority. On the other hand, the unendorsed cash advance is returned to the origin. The unendorsed cash advance could be amended as needed. It should have a note or supporting documents for it to endorse and approved. Otherwise, it will not proceed.
The cash advance protocol usually gives the company the desired budgeting results. Because, before spending it was already checked by the budgeting department. What the budgeting department does in case of amended cash advances (much-needed expense) is make adjustments. They make adjustments on the proposed cash advance (expense) as needed. They look for unused budget or over budget accounts. Then, they amend the budget by subtracting an amount to over budget and add it to the under budget accounts. Finally, update the new budget. This will still give the desired budget because the amount set for expenses is still within the budget. The only change is the set budget per account but the total amount remains the same.
2.) Unexpected Increase in Expense Needs an Increase in Income
Failure to control cash advances will lead to overspending (out of budget). In effect, it will have an increase in expenses. This happens at times the company needs to adopt the market changes. For instance, fortuitous events like a pandemic. Pandemic makes businesses go online. Adopting the new norm will cost the company. These unexpected expenses will increase the set budget. Given the scenario, the company should update the budget together with the gross income. Because that is the main purpose of budgeting, to get the desired net income or more. Now, overspending the budget means reducing the net income.
Getting the desired net income despite an expense increase is a gross income increase. Otherwise, cost-cutting. Companies should think of ways to increase income to overcome the out-of-budget. They may look for new opportunities that the pandemic creates. The company might add more products or services. Otherwise, pivotal. This is the remedy to keep the desired net income. In this case, cost-cutting is not applicable. Cost-cutting isn’t congruent to digitization. If this is the approach it may lead to poor performance. Sometimes unexpected expenses will give a hint on how to increase income. For instance, digitization. Since it cost more to the company, then, the company should use digitization as marketing. Marketing in the sense of widening the scope of customers using online.
3.) Make a comparison of Actual Data and Budget
The comparison of actual data and budget helps the company in decision-making. Comparison will give insights about how far or how close the projected expenses (budget) are to actual expenses. A comparison could be every month. Others do it semi-monthly to assess if there’s a need for an adjustment. Moreover, relax and/or cost-cutting to arrive at a monthly budget. Comparisons signal the company if they are walking on their budget or they are over or underspending.
For instance, the output of low income. Reasons might be the marketing budget is unused due to some changes in the platform procedures. As a result, the income is low. Then, the company might concentrate on how to spend the marketing budget to increase income. They might engage on other platforms that could provide good results. Another reason might be overspending on marketing expenses but provides poor results. Some companies spend more on marketing yet get terrible results. Given the actual data, the company can assess the expenses. If the spend is effective or needs to be cut. On the other hand, if the spending is effective that needs to double down. Actual to budget comparison gives an idea. Ideas on what budget to set in the future years based on data and plans.
Additional Information:
A 5-year actual expenses and budget comparison guides the company on the next moves. Because it provides an output of the company’s previous decision-making. For instance, if the budget fails in 5-year time. Then this means that strategic planning is failing. Moreover, operations are failing, plans aren’t executed, or wrong planning. Because the budget is based on plans. If it fails, here are the possible reasons: budget isn’t met because strategic planning isn’t effective. Strategic planning isn’t executed because operations are not following. On the other hand, if operations and strategies are done and followed yet provide poor results then data implies wrong plans made. The reasons for failures are rotating to those factors. Given the comparison, the company can identify where to exert effort to succeed.
How to improve Forecasting?
1.) Use previous years data in the forecasting
There must be reference data in forecasting the future. Because previous years’ data are certain. Forecasting using certain data will provide close to real data. Previous data gives trends to the company’s performance. Previous data provides the lowest and highest values per account. Given the range, the company can forecast future data by simply formulating values based on range. The company might use the range. Otherwise, averaging depending on the data relevance.
2.) Align the forecasting based on plans
Some company fails with this. They make forecasts merely on previous data. If the company has more proposed projects than previous years then there must be an additional amount to the budget forecast. Vast plans cost additional expenses. The company should add a certain percentage based on how big or small the plans (projects) are. Aligning the forecast will also give an idea of how much effort will be added or needed to compensate for the forecast.
Otherwise, it will become useless because the forecast isn’t compensated. Because plans give insights into how much amount and/or effort is required. Failure to align these factors will result in a wrong forecast. And, eventually net loss. The purpose of forecasting is to have an idea of the future. It might not be accurate but it gives a picture of what the future looks like. And it is a good start and a good guide instead of operating from scratch.
3.) Update Forecast Depending on Strategic Plan
Update the forecast from time to time depending on the strategy made. It may be monthly. It is like checking the accomplishment of the proposed strategies. Failure to execute the proposed strategy affects the forecasting. Because the forecasting is based on the assumption of executed strategic plans. For instance, if there’s a change in strategy then there must be a change in the forecast too. It depends if the strategy made is effective then the forecast will advance or enhance. On the other hand, the forecast may reduce the previous data.
If the strategies will give negative results the company should change strategy together with the forecast. On the other hand, if strategies are effective then the company will double down. Even though no strategy is done at all, the company still has to update the forecast because whatever is done there’s an effect to the forecast. That’s why there’s a need to update forecasts from time to time to become reliable or else it will be irrelevant.
Conclusion:
Budget and forecast have an interrelation. How to improve budgeting and forecasting is based on plans. Moreover, budget and forecast updates from time to time. Strategies, operations, and plans are the rotating reasons for budget and forecast failure. Actual budget and forecast give insights in making a budget and forecast in the future. It also provides relevant results to the company’s previous decision-making. These are the guide to improve budgeting and forecasting to get good results.
Related blog: Bookkeeping Services
Do you need help?
For individual budgeting and forecasting, see Dave Ramsey Channel
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