Budgeting vs. Forecasting: What is the Difference?
Budgets and forecasts are integral to efficient business financial planning. Each process supports decision-making, helping you plan for the future and align strategy to business goals.
While both processes are similar, budgeting involves leveraging historical revenue and expense trends within a specific timeframe to enable financial planning to support the company in the direction you want it to go. It’s a static document typically created yearly, quarterly, or to support a project.
Forecasting also uses historical data to predict cash flow trends and potential outcomes based on supply and demand, seasonal surges, etc. Forecasts can be created monthly, quarterly, or for longer periods. They are dynamic documents that consider business goals and financial drivers and often include “what-if” scenarios and associated expectations.
Those are the broad strokes, but there’s plenty more to consider. Today, we’ll drill down on the two terms and parse out the implications of budgeting and forecasting, their benefits, and how to do it.
What is Budgeting?
When you plan a budget, you’re essentially planning your company’s finances over a period of time. During the process, you’ll leverage available cash flow to cover expenses you know are forthcoming.
When preparing a budget, you’ll leverage information from the P&L statement, the balance sheet, and the cash flow statement.
Depending on the size of your operation, a proper budget can take weeks to complete, and expenses and activities from all departments should be considered.
The next thing to know is that you can create several different types of budgets. It all depends on what you’re trying to accomplish.
· An operating budget covers expected and fixed expenses, like payroll, rent, utilities, benefits, and income from sales and interest.
· A cash flow budget looks at cash in and cash out.
· Establish a budget for a specific project.
· Capital budgets help you plan for big projects, like expansion or new equipment purchases.
· Flexible budgets allow for dynamic changes in sales or market fluctuations.
· Value-prop budgets help you focus on what brings your customers the most value, allowing you to trim or eliminate unrelated costs.
· Zero-based budgets start from zero and are more intensive but can be helpful during cash flow crises.
What is Forecasting?
Forecasting helps you predict cash flow and revenue. While you may have enough historical trends to create a reasonably accurate forecast, it’s still an assumption. Think of it as a conversation starter. Start with what you assume will happen based on your cash flow. Be clear about what’s driving your expenses and the ultimate purpose of the forecast, and it will be easier to nail down.
Like budgets, there are several types of forecasts you can create:
· Rolling forecasts are continually updated by adding new periods and incorporating the latest trends.
· Cash flow forecasts look at cash in and out, giving you an idea of your business liquidity over a set period.
· Inventory forecasts help you plan your strategy for specific periods, seasonally or annually.
· Demand planning enables you to estimate future demand for a product so you can optimize stock levels.
Top Benefits of Forecasting and Budgeting and How to Do It
Undertaking the budgeting and forecasting process greatly benefits your company’s financial health. With accurate budgets and forecasts in hand, you’ll be able to do the following:
· Mitigate overspending
· Reduce unnecessary costs
· Know where you need to put your money
· Pinpoint areas you need to focus on
· Plan for the unexpected
· Ensure your income aligns with your expenses
You’ll also be able to strategize for business growth, which is a great position to be in as you can look ahead, envision where your company will be in a few years, and make strategic moves to go in that direction. A good budget can keep you on track and let you know where you’re falling short.
Be sure to involve all relevant stakeholders, like your dispensary manager, office manager, production manager, etc., so they can weigh in on what’s ahead – and don’t get bogged down in details like office expenses. Think about what drives growth and focus on that.
If you’re keen to get started, here’s a basic plan to set you on the right track.
1. Set achievable goals. Think about short-term and long-term financial goals, as these will form the basis of your planning activities. Look at past spending and determine whether there is justification to continue. Cut spending where needed and decide where to reallocate funds.
2. Decide what type of budget you’ll create: zero-based, surplus budget (applicable if you’re bringing in more than you spend), value proposition-based, incremental budget, or rolling budget.
3. Project your revenue. Consider all types of income, including sales, interest, subscriptions, affiliate programs, etc.
4. List your fixed costs. These include rent, payroll, or any expenses that are consistent from month to month.
5. Determine your variable expenses. These might include contractors, casual labor, R&D, sales, marketing, and COGS.
6. Detail all planned capital expenditures. This could include equipment purchases, bonuses paid, upgrades to the premises, new computers, etc.
7. Plan for the unexpected. A portion of your budget should always be dedicated to emergency funds to ensure you are covered in case of an emergency.
Budgeting and Forecasting: Common Mistakes
When creating a budget or forecast for the first time, it’s easy to get caught up in details that might not matter that much.
Once you get the hang of it, you’ll know what to focus on and what can be deprioritized. Ultimately, you need to finish it as quickly as possible without overlooking key details. After all, you have a business to run and probably have other things to do. Right?
Budget-related things that might drag you under include:
· Using unsupported numbers to create the budget
· Too much detail!
· Not looping in your key department heads
The top three forecasting mistakes include:
· Not separating fixed and variable costs
· Not including what-if scenarios
· Choosing an arbitrary percentage as a basis for projected growth
Budgeting and Forecasting for Bottom-Line Results
If you need help getting started with budgeting and forecasting for your cannabis operation, Growise is here to help! Set up a call today, and let’s get started.