If you are a department leader in a multi-faceted organization, it is very likely that you will be asked to create a department budget and forecast. Even as a department of one at Leap the Pond, I am responsible for creating and maintaining my budget. It can be a long and tedious process; however, it is critical to the operations of the business. Our individual department budgets combine to create our comprehensive company budget. The company budget is used as a baseline to gauge the health of an organization. It is a living breathing organism that should be able to adapt with changes in your business.
This topic is relevant to any organization, no matter how big or small you are. Our friends at Centage are experts in this field. They recently shared their blog titled “Why Financial Forecasting is Particularly Critical in 2018” with us.
Every company goes through the process of creating a budget and a financial forecast each year. Budget season is marked by the executive team making projections about the economic and business conditions in the next 12 to 18 months, and documenting how they plan to respond to those conditions.
All too often, however, once the budget is complete, it more or less sits on a shelf until the next year. This is understandable, of course, since budgets are often created in Excel, with myriad formulas linking multiple sheets together. It’s hard enough to put an initial budget together; updating it weekly or monthly to reflect actuals is a herculean task requiring a team of Excel power users.
But there’s tremendous value to be gained by viewing a budget as a tool to monitor the health of your business. As conditions change, management must be able to quickly and intelligently make decisions driven by actual results.
This is particularly true in 2018. As we rang in the new year, a new set of tax cuts went into effect, cuts designed to stimulate growth in the small to mid-size business sector. The stock market is at an all-time high, interest rates are low, as is unemployment. Consumers spent freely this past holiday season and not just on gifts; Deloitte reports that self-gifting accounted for much of the spend.
All of this data points to a high degree of confidence in the economy, which, in turn, is viewed as a green light to embark on ambitious plans to grow.
But that enthusiasm is tempered a bit with other developments. Will the elimination of the state and local tax deductions cause strain for homeowners in states with high tax rates? If so, will they begin to default on their mortgages? What is the impact of world events on economic confidence? Will escalating threats of pushing the nuclear button cause consumers and businesses to retreat?
So, although the economic indicators are good at this moment, it’s understandable why many CEOs are approaching the New Year with cautious optimism. The mantra seems to be: think big, but keep your eyes wide open.
And that brings us back to the importance of continuous forecasting. As companies begin working towards their 2018 business goals, it’s essential to track performance to plan on a regular basis in order to spot trends that require a course correction. As one CEO of a manufacturing company said, “I try to analyze actual results against my forecasts on a weekly basis, because it gives my organization 52 chances a year to make corrections.”
Predicting market conditions 12 or 18 months in advance is difficult, especially if the economy experiences uncertainty or volatility. For this reason, we recommend small to mid-size businesses shift to a rolling forecast, which allows financial teams to project out as the year progresses.
We have also become fans of Balance Sheet forecasts. Many companies rely on their P&Ls to monitor cash levels, but with deferred revenue and expenses, it’s all too easy to miss critical details.
Workforce expenses, sales and revenue, all of these forecasts should be updated on a regular basis if executive teams are to keep a sharp eye on their businesses in the coming year. And while this sounds daunting, critical developments make it much more doable.
To begin forecasting, planning, and budgeting software solutions, such as the Maestro Suite™, streamline the process, applying intelligence to ensure inputs are applied accurately and automatically.
Second, critical business systems, such as CRM and HR platforms, generate robust data that can be entered into the budget modeling software, enabling CFOs to create highly detailed forecasts.
To this end, Centage has created a forecasting eBook that looks at financial forecasting in a variety of ways, covering:
- Rolling Financial Forecasts
- Forecasting for:
- balance sheet
- cash flow and income statement
- workforce expenses
- Forecasting Technology
For more information on Centage, or to download their eBook, click here.
Centage’s original blog was posted here.