There’s no denying budget forecasting is one of the most critical parts of any organization’s financial planning. It provides a necessary baseline for leaders to use when making decisions and plotting future growth.
But all too many companies leave it to the last minute and find themselves scrambling as the year draws to a close.
That’s why we’re exploring the many benefits of starting your annual planning early by getting to work right now!
Benefits of Early Budget Forecasting
Businesses that take the time to do their budget forecasting early see a wide variety of advantages over those who wait. First, planning ahead can lead to improved decision-making down the line, as leaders will have all the necessary time to think through difficult choices and get feedback from stakeholders like employees, owners, or the board.
In the budget process, as with many other areas of life, this additional consideration and lower pressure can lead to better, more innovative, more profitable solutions. Planning early also gives leaders time to set the stage for the new year’s projects, allowing them to hit the ground running when the calendar changes over.
In addition, early budget forecasting can lead to more flexibility and adaptability for organizations. Having a well-fleshed-out budget already in the works makes it easy to tweak and adjust if the economy changes or new opportunities present themselves.
Taken together, it’s easy to see how budget forecasting that’s done with plenty of time to spare can contribute to enhanced financial stability for the short- and long-term.
The Annual Planning Process
While budgeting can seem overwhelming, it’s pretty straightforward when taken one step at a time. Follow these steps to get the process started on the right track.
Setting financial goals and objectives
What is your company really trying to do over the next 12 months? Many organizations don’t take the time to truly consider this, spending all of their time putting out fires and dealing with day-to-day issues.
Company leaders and stakeholders should brainstorm the financial goals for the year ahead, whether they involve:
- Increasing sales
- Cutting expenses
- Adding employees
- Adding or removing service offerings
- Adjusting prices
Clearly spelling these out and having them as organizing principles is one of the most valuable parts of crafting a budget that reflects your values and goals.
Reviewing historical data
Unless a company is brand new, they’ll typically have plenty of historical data to base their budgets on. Look at the past year or quarter’s income and expenses, taking care to strip out or account for any one-time or unusual factors. From here, it should be easy to set the budget by tweaking past levels in support of the goals discussed above.
Identifying key financial drivers
Many companies have a few products or services that shine above the rest. Keep these in mind when forecasting and setting your budget, as they’ll likely provide a significant degree of support based on past years.
Consider whether dedicating more in the budget to these factors could potentially help grow their income even further. Also, consider the financial impact of expenses, which can range from the cost of goods sold to employee salaries to rent and office supplies.
Assess whether money is being used correctly or if more needs to be spent to unlock further value for the company.
Creating a timeline for budget development
Don’t simply assume the budget will come together, or you may waste the early head start you’ve given yourself. Work with other stakeholders to set a definitive timeline for developing the budget. Holding one another accountable to this schedule as much as possible is vital, adjusting only when absolutely necessary.
Gathering and Analyzing Data
While it may seem simple, the first critical step involves collecting all of the relevant data from its various sources. This includes:
- Accounting systems
- Bank account ledgers
- Anywhere else important information may live
Then, take a broad view and assess any internal factors that might impact your future budget.
This process also requires taking a look at broader economic and industry trends, which can provide critical signals about where the economy is going, in addition to shedding important light on how others in the field are structuring their spending and what they’re investing in.
Building the Budget
Building the budget itself is doubtlessly the most critical step of all. Work with other company leaders and employees to carefully allocate resources to each department or project. This is also where you should set revenue targets and limits for various expense categories, particularly ones that may have been higher than desired in the past.
While detailed planning is always essential, the best budget builders know to include room for the unexpected as well. A small contingency fund can do wonders to smooth over unexpected expenses or dips in income.
Monitoring and Adjusting the Budget
Once you’ve built and implemented your budget, the job still isn’t over. Leaders should periodically check how estimates match reality at regular budget reviews. Here, you should identify any significant variations from expectations and take corrective action if needed. In some cases, nothing can be done except note the departure to remember when crafting future budgets. These reviews will require flexibility from leaders and employees, who may have to adapt to changing circumstances on the fly.
Get a Jump Start on Budget Forecasting for 2024
As you can see, there’s plenty to do when it comes to putting together the kind of budget that makes your company the best it can be. That’s why an early start is so critical. But we understand it can be a lot to handle for busy organizations and leaders, which is why PlotPath is here to help.
Contact us today to learn more about how we can optimize your budget and get your organization off to a fast start next year.