When expectations built into budgets are not delivering, then it’s time to revise. Often business people don’t realise there is an issue for weeks because viewing budget vs actual numbers can involve a lot of manual work - so it’s put in the too hard basket. The finance team needs to get the actual numbers from the ERP, manually add them to the budget figures in spreadsheets and then run formulas for comparison. It’s the same team who has spent two months bedding down a budget, who aren’t keen to poke the ‘budgeting’ bear so soon after it has been approved.
Yet, more complex business conditions and external threats are precipitating the need to know how the budget is performing – more often. Set and forget budgets using historical data don’t suffice anymore and can expose a company to greater risk.
Fortunately, budgeting systems have also improved the task of consolidating data faster so that budget forecasting can be done regularly.
What is Budget Forecasting?
So, what is budget forecasting? The simplest way to explain the term is the intersection between actual/current, budget and forecast numbers at any point within the fiscal year. It is more useful when business people can view these three metrics together:
Actuals - represent the real numbers achieved to date
Budget - is a company’s financial plan of intent for 12-months
Forecast - is a more detailed financial plan for for a set amount of time such as for the last 6 months or 3 months of the financial year
Budget forecasting benefits
Phocas Budgeting and Forecasting allows your business to create collaborative budgets as well as regularly track how they are performing in real-time. To do budget forecasting on this platform, you can upload your budget anytime throughout the financial year and make informed decisions about the future.
Budget forecasting is a massive step-up from annual budgets that often act as a barrier to quick and direct action.
Phocas software has a forecast feature providing a simple way of using actual data and budgeted values to compare actual performance to budget and re-forecast the remainder of the budget period. Budgeting this way builds confidence in your business teams’ ability to adapt easily to rapid change.
Phocas makes budget forecasting easy
In the below video, Dan, a business owner, trained accountant and adviser to Phocas, looks at the FY23 budget that has been created for a lighting business. He quickly converts the budget into a forecast for the remaining months of the year. In this instance he selects a 4:8 budget which brings in actuals for July 2022 to October 2022 and a forecast for November 2022 to June 2023. This budget also includes a database driver of sales which is also added to create the forecast.
Once the new budget forecast is built, a finance manager has a revised view of the year and can see the budget figures for 4 months alongside the forecast numbers highlighted in green for the other 8 months.
There are also some extra total columns and buttons where the user can select;
- total budget and see budgeted values for the entire period
- actual + budget and see up-to-date actuals and use the flagpole to see the budgeted numbers for the rest of the period
- actual and forecast where cells turn yellow and can be edited for the future period.
Review, understand budget variance and adjust on the fly
When creating the forecast for the next 8 months, the user can review key actuals and see how they are performing to budget. It is straightforward to compare actual results to budgeted values but the most useful information comes from the analysis of the budget variances.
In some instances, income might be doing better than planned, if this is a result of a unstainable activity you can choose to bring the forecast back to the budget totals using the Snap back to budget button. This aligns the forecasting period with the original budgeted values.
You may alternatively decide that the increased income achieved in the early months of the year is indicative of how the business will continue to perform and therefore decide to use the Follow actuals which averages out the new performance or positive variance for the remaining period.
Once you are happy with the new forecast you can publish it with a new name and do further analysis of the new figures in your financial statements. Importantly you can analyse performance against budget and forecast and see how revenue targets and sales targets are also tracking.
Budget forecasting and variance analysis helps you adapt quickly, make changes when necessary and align your goals across the entire organisation.