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Business Budgeting and Forecasting
Two ways a small business can make a plan are financial forecasting and budgeting. Budgeting is like the road to your end point. Financial forecasting is like your GPS. It makes sure you are going the right way. The two are often used together. An owner needs to know what they are. The owner also needs to know the difference between them. Budgeting uses real numbers. It is daily and used for goal setting. Financial forecasting uses more estimating.
A business budget is not unlike a personal budget. It is a written plan of the possible outcomes a company wants to reach. It is an outline of the way in which a company wants to head. The time limit for a budget is a year. Budgeting can cover estimates of earnings and expenses. It can also involve likely cash flow and cutting debt.
Budgeting stands for a company's goals, financial position, and cash flow. A company will review this budget often. The review is usually once a fiscal year. This depends on how management wants to update the information. Making a budget forms a baseline. The baseline is then compared to actual results. Management will then look at the difference between the two. All budgets do not have to be made for a fiscal year. Some companies may want to be more flexible. The company may want the budget to be divided into half a fiscal year. They may decide to divide the budget into quarters. These are decisions that will be made based on the type of business and the conditions in which the business is operating. The company needs to keep a close eye on the market in which they work so they can determine if the budget needs to be updated. This is especially important when the company is using a budget to make it’s financial decisions. If the company is not careful, they can go in a direction that is out of reach.
Financial forecasting estimates a company’s outcomes of their budgets in the future. It can help establish or update a business plan. The financial forecast reports if the company is headed in the right direction. It also points out if the budgeting goals are being met or if changes need to happen. To do this, the company will use the history of their financial data. Financial forecasting helps the company predict results as they look at the data from previous budgets. There are different features of financial forecasting. One is to help guide companies when deciding how to make their future budgets. Another is that they are updated regularly. They could be updated when action needs to occur right away based on projections. They could also be updated when there is a change in the operation or business plan. The updating is kept flexible and can be quarterly or even monthly as needed.
As one can see, these two aspects of a company’s finances should go hand in hand. You need a good GPS, the financial forecast, to help you get where you’re going. The GPS needs to be accurate and up to date. This GPS will help keep you on the right road, the budget.