A budget is essentially a financial plan for your business that sets out goals for income and expenditure over a given period of time – a topic which my colleague Grant Woolley covered in-depth last month.
Forecasting is a related process that involves projecting the expected outcomes for a business (from an income and expense, cash flow and/or balance sheet perspective) based on assumed conditions. It may be carried out as part of the budget preparation process, but also, as a “what if” tool on an ongoing or ad-hoc basis to aid in decision-making and provide insights into where the business is heading. The key is determining what assumptions are the right ones to make.
Below are some key areas businesses should keep in mind when forecasting and looking to understand their outlook for the 2023 financial year.
Forecast models should be responsive and based on key drivers of performance or profitability specific to the business. Whether using Excel or another solution (e.g. cloud apps such as Futrli or Spotlight Reporting) a well-built model should allow key variables to be changed on the fly to provide timely insights into consequences for the business as circumstances change.
Once a flexible model has been built, time can be spent easily looking at different what-if scenarios to help plan for contingencies and better outstand potential financial outcomes.
For example, a business might look to understand at a high level:
As we emerge from the pandemic cash flow remains of critical importance to business.
Many business accessed state & federal government COVID-19 stimulus measures over the past 2 financials years and/or negotiated rent relief with their landlords. As this support is withdrawn, what is the impact on the business?
The temporary full expensing measure (allowing up-front deductions for certain assets for eligible businesses) remains in place until 30 June 2023. Forecasts may help business owners consider if the next 12 months is a good time to make any planned capital expenditure i.e. whether this is affordable and what the expected return on investment is.
As the economy opens back up, there are many opportunities for businesses to expand and grow. Forecasting can help identify and assess opportunities, and budgets are still a great tool to help drive improvement whether it be cost reductions or otherwise.
Making reviews and updates of budgets/forecasts a regular practice is the key to getting the most out of these tools. It is best to schedule this on a monthly or quarterly basis as part of the management reporting process, and in addition, to use what-if forecasting on an ad-hoc basis as circumstances dictate. This will help the business stay one step ahead.
As Wollongong Accountants and business advisers, who service right across Australia, our team at BLG are well placed to help you prepare budgets and forecasts, understand the numbers, and make decisions specific to your situation that will benefit your business. Find out how we can help you and talk with us today.