What is a full year forecast? Isn't that basically a budget? These are actually two very different tools that businesses can use. In larger organizations both are used and the organization and it's leaders are measured on how close actual results are to budgets. Larger organizations also have dedicated employees or even an entire team that build budgets and analyze, calculate to provide monthly forecasts.
We know that budgets are your businesses plan for the following year and are built at a more detail level. It's a strategic tool to help determine what needs to happen to meet any kind of goals you may have. You want to increase sales or start a new line of business? You can budget this out to find out what drivers you need to impact and how to impact them. The one issue with budgets is that environments that we operate in can change dramatically at any moment and it can impact the rest of the year. Larger organizations will re-budget in the middle of the year to bring budgets in line with what is actually happening.
Full year forecasts take your actual results year to date and project out the rest of the year. As you update each month with the actual results you re-forecast major line items out the rest of the year based on what is happening. Re-forecasting can be done monthly or quarterly. It gives you an idea as to where you will land on the last day of the year. Forecasts are tactical tools and for helping address short term items. There is no variance analysis to forecasts as there are to budgets.
Is one better than the other? With business environments changing as quickly as they are there is no question that a forecast is a more effective tool in seeing the future impact of current events. If your forecast is showing that your revenue or sales will decline, you can take immediate action to address this. If your actual is lagging behind your budget it may do this for the rest of the year and your variance will get larger. There is a risk that at some point in the year, the budget becomes irrelevant to decision making. Also since forecasts have you re-evaluate major items it provides you with the opportunity to see how different initiates are impacting your business giving you the ability to adjust and tune how you run the business to find the right mix for success. As with budgeting, the process for forecasting can be based on trends and percentages and be adjusted up or down to match what is happening.
In the end, forecasts can be a good tool for making course corrections for your small business ensuring you avoid declines and that your year end results are not a surprise to you.
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