You have big dreams for your business. Whether you want to expand into another location, upgrade your equipment, update your website, or hire additional staff, these can all help you achieve greater success. However, they also require money. In order to plan for the future, the two best tools you can use are budgeting and forecasting. Contrary to popular belief, they aren’t the same thing, so to help you better understand what they are and how you can get started, our CPA firm in Raleigh is providing a closer look.
A budget is your financial management tool that outlines your financial steps over a set period, usually a quarter or a fiscal year. Your budget will include:
Your budget maps out your financial plan for what you want your business to achieve. However, it’s unlikely your budget will be 100 percent accurate, so it’s important to compare the expected results to the actual results to find variances. You may need to take steps to adjust your future actions to make up those variances in the future.
Your budget starts with what you have to spend and how you plan on spending it to best achieve your goals as well as the sales and revenue target you’d like to achieve.
It’s important, when creating your budget you are realistic in your cash flow estimates and create different line items on your budget for essential expenses. Also, you’ll want to include a plan for how you’ll pay off debt as well as keeping cash reserves in your budget.
Your forecast is a more accurate, working document where you estimate what kind of numbers your business will actually achieve. While you may forecast your cash flow, most businesses do not forecast financial position and net worth. Instead, the forecast is generally reserved for estimating sales and revenue numbers along with expenses such as purchasing supplies, payroll, and building costs.
While your budget is a financial map of what you want to happen – your stretch goals, so to speak, your forecast shows what is more likely to happen. Using prior financial information for your business and factoring in variables that may increase or slow sales, your forecast should show an accurate look at your revenue and expenses.
Because the forecast is used for short-term operational costs and finances, you will most likely make a forecast for each month, as well as make updates in your business behaviors to stay within the forecast. For example, if your sales numbers are down compared to the forecast, you may consider running a promotion to increase cash flow. Similarly, if your payroll costs exceed your forecast, you may cut hours to rein in the spending.
Whether you need help generating financial statements that allow you to accurately budget and forecast, or you need assistance with monthly accounting, we can help. With over 30 years of small business accounting experience, we will put our insight to work to provide you with the assistance you need to put your business on the path to success. Call us today at (919) 420-0092 or fill out the form below to get started.