If you’ve heard people throwing these terms around, you may be wondering what the difference is and if you need one or both.
One of these things is not like the other
A budget and a forecast are two different things. A budget is your goal for the year. You can create a master budget or a budget for a specific area, like marketing. In either case, you’re going to decide how much you want to spend. This allows you to plan ahead and measure your actual spending against the budget to stay on track.
A forecast is a projection of what’s going to happen in your firm based on historical data. Think of it just like a weather forecast. It’s going to rain tomorrow because the weather is already headed in that direction. Cash flow is an example of a common forecast. Your cash flow forecast will be based on how many receivable invoices you’ve got out, how quickly they’ve historically been paid, and how much new cash flow you typically generate each month.
Why you need both
To maximize your profit and cash flow, you need to use both of these tools in harmony.
By creating a budget, you allow yourself to plan for the year. You can decide how to spend your money in advance rather than in the heat of the moment. That way, you’ll know that you’re doing and what’s in your firm’s best interest, not just what feels urgent.
Your budget is also there to keep you on track. It’s so easy to overspend and not find out until it’s way too late to do anything about it. With a budget in place, it’s easy to compare budget and actual spending on a weekly basis and adjust for any overages before it’s too late.
Have you ever heard the expression “Hope is not a strategy”? While your budget keeps you in line with what you’d like to achieve, your forecast shows you the hard truth about what’s going to happen if nothing changes. The past can be a great predictor of the future, and if you’re not on track to meet your goals you need to know so you can make some big changes.
Forecasting lets you see if you’re on the right path. You may want to grow revenue by 10%, but are you on track to actually do that? What needs to happen to make those numbers a reality?
Together, budgets and forecasts can help you reach and exceed your goals! Our clients find both to be invaluable for growing a profitable firm with a clear, actionable plan. If you’re not sure how to utilize them, we’d be happy to help. Reach out today to schedule a free consultation call.
