12 Ways to Make Budgeting And Forecasting Easier

Building and implementing a budgeting and forecasting process is critical to revenue growth. In today's fiercely disruptive and competitive world, the importance of such an approach cannot be undermined. And during the volatile and challenging COVID-19 era, we need to rethink traditional budgeting and forecasting to make it easier and more effective. 

When companies embrace data and analytics along with established forecasting best practices, they can make better strategic decisions and grow their business. However, many organizations shy away from the process because it can be complicated. 

Therefore, we spoke with TAB Members and Business Owners to create a round-up of 12 ways to make budgeting and forecasting more manageable and straightforward.

1. Get your team involved

Lead the budget effort but don't do it on your own. Get your team involved. Engaging your team in the budget process gets your team committed to making the numbers work. If you can, break the budget into department budgets. That way, you can have the leader of each department manage their budget. If not, have them work on the budget they impact most — for instance, revenue for sales, expenses for operations, etc. Review each budget and work through numbers that won't work (like low revenue numbers or high costs). Make sure they understand the impact on the business. Pull it all together into the company budget and communicate back to the team.

Laura Drury, Owner at TAB Denver DTC

2. Focus on your plan for the following year

Many companies make this mistake: they base next year's budgeting and forecasting on the past year's performance, results, and spend. Fundamentally, a budget or forecast has little to do with what happened in the past and everything to do with the following year's plans. You may find it easier and more intuitive to focus on budgeting and forecasting based on next year's goals, ignoring what happened the past year. This results in better aligned and more accurate budgets and forecasts.

Joe Palmer, Owner at TAB North Texas

3. Examine industry trends and reach out to customers

As part of your forecasting, examine industry trends — both past and predicted future trends from industry organizations and publications. Also, don't be afraid to contact key customers to find out directly what to expect in the coming year. The closer you get to the industry and customer in your forecasting, the more accurate your forecast. 

Jim Morris, Owner at TAB Tennessee Valley Region

4. Look backward to move forward

You cannot make a forecast in your business without closely examining what has happened historically – even with the odd year, we have all experienced.

I have seen many business leaders pluck a percentage growth number and state it like a wish. Growth projections need to be realistic, and the numbers in your business will show you the way.

Start looking at the data that you have access to at your fingertips. Pay particular attention to leads, sales conversion, average dollar sale, repeat purchase and lifetime value, expenditures, and profit. Look for jumps or declines in monthly sales and expenditures and delve deeper into why and how they occurred. 

Highlight any lessons you would apply to your business, and make it part of your plan to create new or improved systems or processes, so these insights and lessons learned will continue to benefit your business in the following year.

Jodie Shaw, CMO at The Alternative Board

5. Five Ways to Make Forecasting Easier

Here are five ways to make forecasting easier:

1. Do it quarterly.
2. Group accounts into categories.
3. Trends are your friends — use rolling three months and rolling 12 months where possible.
4. Measure actuals against forecasts each month to improve your forecasting skills.
5. Work with a trusted advisor.

Scott Morris, Director at TAB East Auckland

6. Prioritize forecasting the most critical areas to save time

The most crucial consideration when financial forecasting is first to figure out what you are trying to forecast. I emphasize to my clients they can save time by predicting what is most important, which for a majority of business owners is how much cash the business will generate, or in some cases, losses over the forecasting period.

Sales growth, gross profits, and operating profits are essential, but the first thing an owner needs to know is whether his company is generating positive cash flow. That requires a look at non-Income statement items like the capital expenditures and the changes in working capital that accompany revenue growth. If your forecast shows that your company is not generating cash for the business, you know it's time to take action on your expenses, working capital, or capital expenditure budgets.

Start by forecasting your cash flow, and you will get the most important information first.

Peter Santry, Owner at TAB Fairfield County, Connecticut 

Want additional insight? Best Ways to Secure Capital for Your Business now to learn more

7. Make sure you have a profit plan

 A "budget" is one of the most basic and necessary financial tools we have for managing business income and outflow so that we can meet financial obligations and grow our businesses. But to optimize the effectiveness of budgeting activities, you need a profit plan.

Profit planning is about taking control of your company's destiny and charting a course for your business. It includes budgeting but also provides the forecasted cash flow you need for operations and capital expenditures.

If companies are preparing budgets, they typically will prepare an annual budget for their accounting year. I prefer a rolling 12-month profit plan. This means re-forecasting the next 12 months every quarter, so you always have a one-year plan.

Rick Arthur, CFO

8. Embrace the process, execute based on data, and analyze results

One way to make budgeting and forecasting easier  is to embrace the process, then execute the data. Most importantly, you need to analyze the results. 

There are so many excuses as to why one does not do the work to prepare a budget/forecast.

Some common examples are:

• It takes too much time 
• It is distracting 
• It is unreliable

It's necessary to understand there is a cost of inaction. Without proper budgeting and forecasting in place:

• Operational plans may not be in sync with sales strategy
• Inventory flow may be off
• Cash flow may be in jeopardy 
• There will be a general lack of financial insight

An excellent way to ease the process is to break it down into three segments:

• Sales
• Operations
• Finance

Once you have the three segments, integrate them into a final product outlining the KPIs to measure progress during the budget year. 

If you have a dashboard, monitor the KPIs daily —actual versus forecast. Every month, take the time to review the working budget versus the actual reporting. This process will allow you to react and pivot your business to avoid lost sales and unnecessary expenses. 

You will reap the rewards as you work ON your business and not IN your business. 

Larry Reines, Owner at TAB Northern Valley - Bergen County, NJ

9. Use a spreadsheet and split your projection into tabs 

The best way to create a complete but straightforward forecast is to split the different parts of the projection into several tabs of a spreadsheet so you can work on each of the assumptions efficiently. Create the following tabs: Direct Labour, Indirect Labour, CoGS, Price, Sales, and link and compile them in the P&L tab. Remember, a forecast has to be easy to manage, or no one will use it. 

Alfredo Puche Lozoya, Director at TAB Nelson, Marlborough & Tasman, New Zealand

10. Ask yourself: How stable are your sales?

Evaluation of your sales year-on-year is critical to a meaningful forecast. Evaluate the percentage of repeat sales year-on-year. Is this ratio changing? Evaluate your product mix. Are all your products and services growing, or are some shrinking? Has buyer behavior changed, making it harder or easier to connect with customers?  

A careful evaluation of these factors will enable you to identify a realistic sales target and a potential stretch target for sales. Starting with a well-justified sales number will allow you to develop sensible budget expenses for your business and to do "what if" scenarios for changes to that sales number.

However, sales evaluation does not stop at budgeting but should be monitored throughout the year. As you evaluate your monthly and quarterly results, you need to assess your sales trends to determine if customer behaviors have changed, consider your product mix's effectiveness, and project the implication if the identified sales trends continue. Your budget should be a tool to help you strategically manage and adjust your business throughout the year.

Byron Roth, Owner at TAB Bethlehem, PA

11. Four Ways to Make Budgeting and Forecasting Easier

1. Review your history or sales and cost of goods sold (COGS) —materials needed to make a sale. Then, subtract the COGS from sales to determine gross margin. 

The percent gross margin tends to be pretty stable over time, so this number can help forecast future periods.

2. Capture any labor cost directly associated with delivering your product or service. When subtracted from the gross margin, this yields your contribution margin.
3. Your gross margin dollars divided by direct labor dollars gives you a practical labor efficiency ratio (LER) to estimate future labor dollars.
4. Using your historical gross margin percentage and LER, you can now forecast the COGS and direct labor related to future sales. 

Here’s an example to illustrate the above methodology:

• Prior Sales $150,000
• Prior COGS - $ 30,000
• Prior Gross Margin $120,000 Gross Margin % = 80%
• Prior Direct Labor - $ 20,000 LER = Gross Margin/Labor = $6.00                       
• Prior Contribution Margin $100,000 Contribution Margin % = 66.67%

• Future Sales $240,000
• Future COGS - $ 48,000 Future Sales – Calculated Gross Margin
• Future Gross Margin $192,000 If Gross Margin = 80%
• Future Direct Labor - $ 32,000 Gross Margin/LER = Direct Labor
• Future Contribution Margin $160,000

Contribution Margin is a powerful number to know about your business. This example means for every $1,000 in sales, $667 remains after material and labor to pay for overhead, profit, and taxes.

It is often the case where added sales do not require an increase in overhead, so the contribution margin is profit. Where possible, examining the contribution margin by order, customer or product can often identify your business patterns where you will want to focus future sales efforts for more robust profitability.

Also, your LER tells you how many gross margin dollars you earn for every labor dollar. These figures will help with forecasting and decision making for your business.

Wm. David Levesque, President at TAB Rochester, NY

12. Is Your Budget Active or Static?

A budget is another version of your annual plan; it provides you with a view of what numbers to expect during the year. Just like a yearly plan, your budget is not cast in stone and needs to be updated during the year as your plan changes.

To prepare a reasonable budget, you need to know two things. First, you need to know your numbers. To get these numbers, you should look back at the past. The second part is what you expect to happen during the year (your forecast). How much and what business you expect to do during the year. This will help you build the revenue aspect of your business. 

Once you have your initial budget, you need to revise it as the business progresses for it to be a useful tool. This is where many companies got lost during the 2020 pandemic. Companies prepared an initial budget but didn't know how to update it to adapt to the dramatic change in the business environment.

When you consider your budget as an active process instead of a static document, it will help you see your business more strategically, enabling you to mitigate risk and capitalize on the opportunity.

Joe Farach, Owner at TAB Northeast Georgia