The essential need your business doesn't take seriously - Budgeting & Forecasting
As a founder myself, I have spent a lot of time speaking with founders, finance managers, financial controllers and other flavours of financial professionals from startups to medium sized, 20 year old matured businesses. The message is loud and clear.
You’re likely to be a person responsible for the future financial planning for your business or a part of it, and can probably relate when I say:
• budgeting & forecasting is not easy
• you’re not always given all the time you want to spend on it
• you’re left in a tough situation when the financials don’t meet expectations.
Don’t worry, you’re not alone, every single person I have spoken to about this feels the same.
Are we setting ourselves up or planning for the future?
83% of businesses I spoke to had growth at the heart of their business objectives. So gaining new customers or increasing revenue was the main target for the future.
The remaining 16% of people were primarily focused on becoming more profitable.
They each had very clear objectives of what they wanted to achieve and how they were going to get there, which I’m sure you can relate to, however many admitted to not taking future financial forecasting as seriously as they should.
I heard responses such as,
“My business is simple, it doesn’t require a full blown forecast”
“My industry and business is too complicated to generate an accurate forecast”
“We can never keep to our budget anyway, so there’s no point”
But it shouldn’t be about the destination, it’s the journey that matters. What many businesses lack is a simple, clear and motivating set of targets that detail a plan of attack. A plan of attack that explores the likely + material scenarios that can hurt a business and what they’re going to do if that happens. But also how to make the most of a good situation.
It should clearly detail things like:
• a clear financial trajectory, including good and bad case scenarios, all for at least the next 12 months
• levers to drive and accelerate growth, as well as levers to reduce costs
• ways to combat competition, declining market share, pricing strategies
• department/function breakdowns and trends
• external market factors and hedging strategies
• funding requirements and investment strategies
Budgeting & forecasting is not about setting financial restraints for your business.
So why even budget & forecast?
55% of small and medium-sized enterprises (SMEs) don’t survive beyond their first 5 years, and if they do, 61% go on to struggle to achieve continued growth. What’s fascinating is that the same percentage of SMEs, 61%, don’t officially budget & forecast.
Now, we cannot ignore market forces, management bloopers, and other negative drivers, however without simple targets and accurate financial forecasts that motivate employees, survival and growth are destinations instead of the calculated plans for your success.
Okay, but can we agree on what is a budget and forecast?
A budget is a plan of how much money your business will likely generate and spend in the future using your best expectations at the time you decide to do it.
A forecast is similar to a budget but you do it more regularly (e.g. monthly), it can change through the year, and is used to see how close the business is to its targets and correct the course if things are not going to plan
Hopefully you agree, as 100% of our budgeting & forecasting respondents thought so too!
But more importantly...
What can budgeting & forecasting do for me + my business?
Well, of people who budget & forecast:
The big Myth: “You cannot use past information to predict the future!”
This is something I hear from people often. Yes people predicted we'd have flying cars by now (damn that would be cool) and got it completely wrong, but companies are very different, your company is different. You understand the inner workings of your business, you understand your customer and their needs, you know who the competition is and how they bite. What futurists got wrong here wasn’t the desire to predict what is to come, they forgot to fully appreciate what is the driving force of change, and for your business, it’s you and your team!
Now, you are involved in the future forecasting of your business and hence, people are relying on you to accurately chart a projection of the future of your business given many, many moving parts. Changing demand for your company’s services, competition stealing your customers, and updates to key business assumptions/strategy - this is just the tip of the iceberg. Yet we have the world's best supercomputers calculating the exact minute the sun will set, but when expected to accurately forecast and plan the next year for your entire business, all you’re given is a laptop and a spreadsheet? The issue isn’t that you can’t forecast well, the issue is we’re expected to predict the future with a process that’s stuck in the past.
But you’re not alone, 70% of people in your shoes said forecast accuracy is the most difficult part when budgeting & forecasting, but the same group expect technology to help them create more accurate forecasts in the near future. This includes:
Again, the same 70% said the biggest benefit of more accurate forecasts would help their business make more confident decisions about the future and directly reduce their business costs
Just to be clear, throwing more money at this problem will not solve it. As even the world's largest companies also miss their targets.
So what could be the problem?
Here are the key reasons:
Fine, I’m in between a rock and a hard place, what can I do?
The truth is, there isn’t a lot of quality material out there detailing how to significantly improve future business planning. It’s somewhat gone under the radar - however, fortunately for people in our shoes, it’s finally beginning to change.
Be careful with spreadsheets for financial planning
I know I feel incredibly attached to the Excel models I put several weeks/month into (wow, I didn’t think I’d ever say that). However spreadsheets were never designed for technical financial forecasting, and emerging technology/startups are beginning to dedicate themselves to giving people the right tools to plan for their success.
But be careful, they’re often fragmented so you need to figure out what you care most about and what solution gives you exactly what you need for your situation - do not settle for anything less.
Given the recent shift towards future planning, there are many free trials to some really powerful technologies floating around. Get involved and test them out for yourself
Start early and break it up
Give yourself at least:
• 3 weeks to build the initial budget & forecast model, if you don’t already have one
• 1 day a month to review variances and make tweaks
• 2 days a quarter to reforecast given updates and new information
It’s not always easy, but:
• speak to your team about the importance of making sure the entire business is comfortable, aligned and motivated to a set of realistic budgets.
• make sure you’re given ample time to regularly forecast throughout the year and clarify upfront that the forecasts will likely change, established how this is normal and expected.
But most importantly, remember it’s about the journey and not the destination. Plan your attack, align your team, and get to work.
Now over to you, go do what you need to do and chart a course to your company’s success, one budget at a time!