Budgeting and Forecasting: Creating an Attainable Goal

By Rory King

Ask a business owner the main question that drives them every day. How can I grow my business and increase sales? Although many business owners have a great deal of historical data burned in their memories, it is good practice to put the process in a concrete form. The Innovative Services Group at DHJJ helps business owners by giving them the tools or implementing the processes needed to help grow their business. These specific processes are known as budgeting and forecasting.

Budgeting:

Budgeting is a process of using historical data to create a plan for the next year, so a simple budget starts with the prior year’s numbers. The budget is typically prepared once annually and established at the beginning of the company’s calendar or fiscal year.

When creating a budget:

  • You may decide to increase or decrease by a set percentage across the board for sales and operating expenses.
  • Cost of goods sold is most likely tied to sales based on your company’s historical gross profit margin.
  • Fixed expenses such as rent, utilities, or depreciation expense should be budgeted as actual numbers.
  • Interest expense tied to a bank note should also be entered as an actual figure in the budget.
  • Payroll expenses in the budget should also be adjusted for wage increases or changes in the number of staff that are employed.

Budgets create accountability within an organization at all levels. Sales managers and sales people are accountable to figures they have agreed to for future periods. Compensation can be aligned with their individual budgets.  Supervisors and executives are accountable to make sure there is transparency in the budget, so each department knows their required goals. The budget contains critical information to operating a business in real time. The budget is a road map for your business to assist management with major decisions based on solid analysis. By reviewing a budget, the business can answer questions such as; What is our breakeven point? Can we afford to purchase that new piece of equipment? Do we have the capacity to take on that new project?

Forecasting:

Forecasting is a process of using current year-to-date actual data and predicting the outcome for the next months, quarters, or years. The budget is used as a baseline for creating a forecast. The forecast differs because it is adjusted continuously. Businesses should be reforecasting throughout the course of a year to account for changes. A forecast may change if a business picked up a new contract which was not in the original forecast. The business may have lost a contract. Hiring a new salesperson who is covering additional territory. New legislation or tariffs could be increasing product costs or increasing the cost of doing business. Every change needs to be considered and monitored continuously to adjust the company forecast. A forecast can provide useful information that management can use to take immediate action, such as operational considerations in inventory levels, staffing adjustments, or production.

When creating a forecast:

  • Keep goals realistic, concrete and measurable.
  • Have sales personnel provide their projected sales to assist in establishing the sales forecast.
  • Cost is measured at the historical gross profit margin.
  • Consider adjustments to cost of goods sold for large dollar value projects with margins that are different from the historical figures.
  • Adjust forecasted payroll amounts for staff changes in wage increases or decreases.
  • Adjust utilities expense in the event a second and third shift is necessary for production
  • Adjust operating expenses for any market changes that are relevant to your business

Just like a budget, a forecast can also create accountability within an organization at all levels. A sales manager can reasonably be expected to reach projected goals or explain why when they cannot.

Lastly, a forecast is not only a useful tool for management but a useful tool for tax planning. The forecast provides the expected performance of the company which can be used to determine the projected tax outcome of the shareholders or partners. Knowing ahead of time provides opportunities for the business to make decisions that can potentially minimize the tax for shareholders and or partners of the business.

How DHJJ Can Help

The Innovative Services Group at DHJJ has a team of trusted, experienced professionals that handle all areas of business consulting, tax, and financial reporting compliance. We work with business owners and controllers, assisting them by using tools such as creating budgets and forecasts. These can provide businesses with the roadmap necessary to make real time decisions. A budget is a plan of where a business wants to go. A forecast is a calculated estimate of where a business is actually going. To contact DHJJ’s Innovative Services Group, call 630-420-1360 or fill out the form below.

  • *required information

    PERSONAL INFORMATION