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Corporate Budgeting and Forecasting

What are the financial goals of your company? Whether it is to make more money, grow your staff, or expand your market reach, none of these will be achieved without a solid financial plan. Two courses of action to achieve your goals are corporate budgeting and financial forecasting.  

Now, I understand that no one can accurately predict the future, but you can make informed decisions, set clear financial goals, and remain on the right path to meet those goals through corporate budgeting and forecasting.

What is Corporate Budgeting?

Your corporate budget is your company’s financial blueprint that helps you set financial goals and objectives over the upcoming year by outlining your expenses, your revenue, and what you want to accomplish. However, budgeting isn’t just listing numbers and hoping for the best. Corporate budgeting is the financial course you want your company to follow and it will illustrate what you want to achieve.

For example, did you know that more than half of companies – 61% – have made changes in the way their company operates since the COVID-19 pandemic? This means, in order to evolve successfully, your company needs a solid financial plan through corporate budgeting to become more responsive to the world’s changing business needs. Once you have your budget, you can use it to forecast where your company is headed.

What is Financial Forecasting?

Financial forecasting uses historical data to estimate where your company is headed. But you may be asking yourself, how do I predict the future? You can use the past to predict the present.

This is where your historical data comes into play. For example, if for the past three years your sales have gone down in the fall, only to jump during the holiday season, this prediction will probably hold true again. So, you can look ahead to lowering your budget expenses during the fall in preparation for a revenue bump during the holidays.

The First Step: Create a Budget

Your budget will set your company’s expectations over the next year, and it’s more than just an Excel spreadsheet. And remember – your budget is created BEFORE your financial forecast.

Effective budgeting means reviewing your company’s numbers and then using specific measuring tools and techniques to plan and forecast how you will handle the future. Here are some tips I would suggest to be better prepared for the upcoming year and prepare for any unexpected emergencies (hopefully not another pandemic!) that may arise:

  • Determine your revenue – How much money does your company need to cover your expenses and meet your sales goals over the next year?
  • Adjust your spending – When you track your progress, you can adjust your spending accordingly.
  • Pay off debts – Yes, part of a successful budget is paying off outstanding debts to positively influence your cash flow.
  • Talk to your investors – Show them you have a clear vision of where your company is headed. This includes communicating, from your financial forecast, your company’s yearly objectives, financial performance, and growth potential down the road.

Your corporate budgeting and financial forecast will only be effective if it is realistic. This means being accurate about your company’s expenses, income, and measurable goals over the upcoming year. If not, you’re ultimately setting your company up for failure.

From Budget to Financial Forecast

Remember that your corporate budget is created to meet a certain yearly goal, while your financial forecast will examine whether this target will be met. After reviewing your historical figures and budget for the upcoming year, you will need to sit down with your financial expert (unless this is you) and decide which financial forecasting method will work best for your company. I’ve briefly summarized the four forecasting methods below:

  1. Straight-line method – If your historical statistics show that your company consistently has a constant growth rate, use this simple method! It is easy to use as long as you haven’t seen any seasonal variations (like my example above) or unforeseen changes (like a pandemic).
  2. Moving average method – If your historical statistics illustrate seasonal changes, this method can help you forecast the demands for your products during certain times of the year. For example, if 2022 saw a demand for your products in January through March, and then a lull in the summer, this method can then be applied for the upcoming year.
  3. Simple linear regression method – Now we’re getting a little more complicated, but this method can identify trends, patterns, and other issues that the other methods may not see by analyzing one independent variable (for example, time) and how it affects a dependent variable (sales).
  4. Multiple linear regression method – This method just adds more independent variables. Maybe you need to review how much you spend on advertising and social media, the prices of your products, as well as time of year, and then how they affect the dependent variable of your overall sales. This method will review all of these variables to see where your company is headed.

Looking Ahead…

Corporate budgeting and financial forecasting will help you think about the future accurately, estimate your business’s financial needs, and ultimately keep your customers and employees happy. Your budget will outline the direction you want to take your company and the financial forecast will indicate how this will happen in the future. If you are finding the budgeting side is getting too complicated, you can look into implementing a cloud-based ERP and Financial system like NetSuite. If a cloud-based ERP is the logical next step for your business, Critical Connexion can help you automate and keep track of your financial needs.