6 Ways to Improve Your Budgeting and Forecasting Process
Budgeting and forecasting are a necessary part of any small business’ cash flow. To avoid going over budget, use these tips to guide you.
Every year, your staff probably fights to get their budgets approved. It’s impossible to meet all requests, but there are ways to ensure you don’t go over budget at the end of the year. And while we live in uncertain economic times, you can improve your sales forecasting process as well.
1. Listen to Your Team
Your goal is to keep spending down, but don’t let that get in the way of hearing what your employees have to say with regards to where your spending should go. Give them the opportunity to present their budget ideas and back them up, and really give each one thought.
For example, if your marketing department insists that you need to put more into social media (something you don’t really understand), let them explain why social media is important in your marketing strategy and show you studies that prove it. Give it a chance, even if it's only for six months, to see if it’s viable.
2. Use the Right Software
While you certainly can create budgets and forecasts with a spreadsheet, you’re better off using a more sophisticated software program that is designed to calculate these two. The bonus is they’ll print pretty graphs you can show off in presentations. If you’re required to adhere to GAAP standards, most software already has them built in to assist you.
3. Look at All Factors
When forecasting sales, look at everything that can affect your sales:
- Economic conditions and how they affect buying
- New products on the market
- Price and cost
- Production capacity
- Industry news and regulations
Don’t simply add 20% to last year’s sales, as this may not be realistic. If you did well in 2007, then you know that that could be no indicator of how you did in 2008 when the economy crashed.
4. Pay Attention Year ‘Round
You need to be aware of your budget all the time, not just when you approve it. If you’re spending a bit more than anticipated in one category, try to bring other costs down. If you analyze your spending each month, you should be able to stay within the range you anticipated.
5. Update Your Costs
It’s easy to throw out a number for areas like human resources and marketing, but make sure to break down all costs specifically. For example, are you aware of whether or not your employee medical insurance costs are the same as last year? Probably not. Work with department heads to get exact costs, such as advertising rates, so that your budget is as accurate as possible
And be realistic! Lowballing costs only hurts you in the end, as you’ve already deemed the activities on the budget as necessary. It’s better to build a buffer in your budget to protect against the unforeseen than to try to cut corners.
6. Throw Out the Unnecessary
When you look at your budget for the upcoming year, determine whether you need everything that was on the budget last year. Perhaps you invested in new computers for one department; that’s an expense you likely won’t need to repeat this year. If that Yellow Pages ad didn’t bring you new business, cancel it and put the money elsewhere. Go line by line to determine what is a necessary expense and what can be cut.
With the cooperation of your department heads, budgeting and forecasting don’t have to be a headache. Be open to hearing everyone’s input, but be firm when you need to be. Use the adage “plan for the worst, hope for the best” so you don’t end up over budget and under what you forecast for sales.