In the face of 2024’s business conditions and general economic headwinds, companies worldwide are grasping for tools and strategies to keep them afloat in the short-term. There’s even a catch phrase for it now – “Stay alive until 2025.”
For many, it’s back to basics: budgeting and financial forecasting. Understanding the dynamics between the two and how to get the most out of them has become essential against a backdrop of funding drying up, everything getting more expensive and “customer optimizations.”
Need to brush up on your budgeting skills? It’s time to go back to school with a budgeting and forecasting 101 lesson. We have the details to shed some light on these two foundational parts of running a successful business, and how you can use these fundamentals of corporate financial planning to drive actual results.
Table of Contents
Budgets vs. Forecasts
Budgets and forecasts are pivotal parts of a company’s financial picture, but they have distinct characteristics. Unpacking their differences can help businesses strategize more effectively when the going gets tough.
What Is a Budget?
A budget is a financial plan that shows how much money a business expects to make and spend in the future. It’s the baseline blueprint of a company’s financial operations, dictating how much to plan to spend and on what.
Predetermined based on historical data and the business’ aspirations, a budget typically covers spending across different departments, marketing campaigns and other expenses. Once it’s set, the budget typically remains unchanged to become the benchmark for financial performance.
What Is a Forecast?
A forecast predicts a company’s future financial events based on current and past data. Forecasts anticipate future financial outcomes based on ongoing business trends, market conditions and relevant data from the business.
The forecasting process can include basics such as a forward revenue forecast, but will also bring in other important line items such as projected headcount and fixed office costs.
Where budgeting is static, forecasting is a dynamic process that forms a major part of your company’s overall business plan. Think of it as a GPS that continuously recalibrates if you change your journey. That means forecasts can be frequently updated, especially when internal changes or big external factors (we can think of a few of late) pop up.
What Is Budget Forecasting?
Budget forecasting is a methodology that combines a budget’s structured plan with the predictive insights of forecasts. It’s about taking your business’ financial plan (the budget) as the foundation and making educated guesses about future events (forecasting).
Through budget forecasting, companies can draft a financial plan grounded in up-to-date data while keeping an eye on the future’s potential good and bad scenarios. The result is a dynamic financial strategy that stays relevant and actionable throughout the year.
Why Is Budget Forecasting Important?
Want your business to be able to adapt in real-time, set realistic financial goals and use funds as effectively as possible? Then, you need budget forecasting as part of the FP&A process.
Forecasting budgets combines the best of two worlds: planning and adapting. By cross-referencing past historical data and forecasts for future projections, finance teams can set realistic and accurate financial goals for the company.
A regularly updated budget forecast evolves with any shifting market dynamics – especially this year when the business landscape feels like quicksand. Companies with budget forecasts are less likely to be caught off guard and can make quicker decisions to stop the business from stagnating.
Budget forecasts are also handy for resource and budget allocation. When economic conditions mean cutbacks are the name of the game, optimizing where the budget is spent for the highest returns is crucial.
How Budget Forecasting Can Help You Navigate Economic Slowdowns
The Fed has had a tricky job reining in rampant inflation for the last two years. While the roadmap for further hikes is looking a little less intimidating, companies are still anticipating they’ll be operating in a high-interest environment for some time.
This has had knock-on effects on all parts of the economy. Borrowing is much more expensive, the property market has ground to a halt, and economists say the era of cheap credit is firmly behind us. RIP, the 2010s.
The reality for companies is very real: S&P Global Market Intelligence has recorded more US corporate bankruptcies in 2023 than the previous two years combined.
That’s why, in 2024, any CFO worth their salt is placing more importance on budget forecasting than ever before. After the halcyon days of 2021, when the market was flush with cash, start-ups now face their first proper crisis. Fine tuning the decision-making process by proactively planning ahead is the best way to prepare.
Economic downturns are characterized by rapid changes. Markets fluctuate, consumer demands shift, and businesses often need to pivot in a very short period of time. A forecasted budget means businesses can reallocate funds from one department to another to keep the business going.
A budget forecast isn’t just a nice to have. For CFOs and senior finance executives making tough calls, it really is a non-negotiable strategic planning tool. For instance, if a product line is predicted to underperform due to a change in consumer preferences, the forecast can help them see where the cash may be better spent.
With continuous updates to the forecast based on real-time data, the executive board is always informed. When every decision carries weight, budget forecasting at least means they’re data-driven ones, not based on hunches.
How to Create a Budget Forecast in 6 Steps
Making a budget forecast might feel like a tall order when you’ve got the rest of the business to run.
1. Gather Data
The foundation of any accurate budgeting process lies in the data you use. Begin with your annual budget, which sets up the financial benchmarks for the rest of the year.
Most budgets are created based on a fiscal year, so they don’t always factor in the seasonal nature of revenue and expenses. This can lead to disparities between anticipated figures and actual results during certain times of the year.
To turn your yearly budget into a monthly forecast, spread out the budgeted amounts each month. When you add up these monthly figures, they should match your total yearly budget. You can use different methods to achieve this, like the straight-line method or what-if scenario analysis.
2. Review KPIs
Determine and understand the KPIs that are most relevant to your business, which could include metrics like customer acquisition cost, monthly recurring revenue, or gross profit margin.
The KPIs will help to influence operational decisions and set a benchmark for staying in line with the budget forecast.
3. Understand Company Revenue
Analyze your revenue streams. Where does the bulk of your income come from? Are there seasonal trends? Recognizing patterns now can better inform the budget forecast. This is an area where technology can be a big help.
4. Understand Company Expenses
List down all of your fixed and variable costs, like rent, salaries, marketing expenses and production. This is another chance to identify any seasonal trends or fluctuations.
5. Analyze Cash Flow
Review the flow of money into and out of your business. If you’re bringing in more money than you’re spending, good news – you have a positive cash flow. If it’s the opposite situation, you’re in a negative cash flow.
6. Forecast Changes
Once you have the current budget completed, you can make amendments to those budgeted values to reflect changes you expect to see in the forecast period. It might be that you expect profit margins to reduce as manufacturing costs have increased, or expect growth in certain markets and stagnation in others.
All of these assumptions can be built into the numbers, giving you a ‘best guess’ financial position for the coming year.
After these steps are completed, you have your budget forecast. This is a living document that benefits from getting new data so your predictions are still accurate and actionable.
The Importance of Up-to-Date Data
Trusting old data for budget forecasts is like reading last month’s weather report to decide what to wear today — you’re gonna end up getting soaked. At worst, it’s a disaster for your company’s long-term financial picture.
Here are some examples of how relying on old data for budget forecasting can lead to issues down the line.
Reflect Current Market Conditions
Businesses know all too well in 2024 that today’s market dynamics can be drastically different from just a few months ago. Up-to-date data ensures your forecasts reflect as current a picture as possible to make those big financial decisions.
Example: A business bases its advertising budget on data from two years ago, not accounting for the recent drop in digital ad revenue. It’s a potentially costly oversight that could result in overspending.
Capture Emerging Trends
Fresh data is the backbone of letting companies work out how to react quickly and adapt to new trends. In a fierce business environment where competition is rife, staying relevant matters.
Example: A retailer relying on last year’s sales data misses out on the rising popularity of a new product category, losing potential revenue and market share.
Avoid Unnecessary Risk
Staying updated with data helps businesses take a proactive rather than reactive approach to storms on the horizon. Being able to strategize and side-step a hurdle is infinitely preferable to being caught out.
Example: A company considering a significant investment in a new product line might reconsider or adjust its strategy if they were aware, through up-to-date economic data, of an impending market downturn.
How Mosaic Can Help Businesses Forecast Their Budgets with Real-Time Data
Gone are the days when budget forecasting took weeks and had to be done manually. Manage everything and keep stakeholders informed with Mosaic, a one-stop shop for financial modeling, collaborative budgeting and planning with real-time data.
With Mosaic, you’re not just working with static, irrelevant figures. Our platform integrates seamlessly into your company’s financial psyche, pulling together real-time data to make budget forecasting simple.
If sales spike or unexpected expenses crop up, Mosaic effortlessly adjusts the forecasts so you can face any hurdle and be prepared for the challenge. View live impact details, create rolling budgets and compare scenarios so you’re always ahead of the curve.
Beyond the numbers, Mosaic’s platform offers in-depth analytical insights for planning and forecasting. Understand not just where your money is going but why, too.
Scaling quickly? We’ve got that covered – our pre-configured templates and streamlined modeling platform ensure your budget forecast is accurate, no matter what the economy throws at you.
Secure your financial future today with Mosaic.
Budget Forecast FAQs
Why do companies forecast budgets?
Companies make budget forecasts to plan how they’ll spend and earn money in the future. It helps them get ready for what’s coming and use their money wisely.
What is the difference between budgeting and forecasting a budget?
How can Mosaic help with budget forecasting?
Own the of your business.
