Importance of Budgeting and Forecasting for a Small Business
Updated: May 20, 2022
As Winston Churchill once said, "He who fails to plan is planning to fail." One commonly overlooked but valuable way to improve the performance of your business is to create a budget and create a forecast. The two terms are often used interchangeably, but there are subtle differences between forecasting and budgeting. Both are important for different reasons.
Budgeting to be a valuable tool to control spending. Setting up and sticking to a budget allows a business to reign in wasteful spending and more easily identify when an expense is getting out of hand. A budget is periodically compared to actual results to identify and explain variances. I recommend using a budget for the current year.
Although similar, forecasting is different from budgeting. Forecasting can be a valuable tool for goal setting and growth. Forecasting is also helpful for cash flow planning purposes. I recommend creating a high-level forecast for the next three years. A forecast will project out the anticipated revenue and expenses for future years, based on growth estimates.
Essential for Both New and Established Businesses
Whether your business is just starting or is established, budgeting and forecasting are both valuable tools.
For a new business, utilizing a budget is an excellent way to keep spending under control while the business is first getting started and every dollar counts. A forecast helps a new company establish its goals for growth over the next 1 - 3 years (or however long you choose to project out).
For an established business, a budget can help the company analyze variances in spending and make the necessary adjustments. A forecast for an established business is helpful for goal setting and also for projecting cash. It can be especially valuable when determining whether there would be enough cash to hire an additional employee or expand operations.
Plan for Success
The above summary was just a quick overview. Still, I can not emphasize enough the importance of budgeting and forecasting for a small business. Having a budget in place can help to keep a small business healthy, and forecasting can be essential to continued growth through planning and goal setting.