The importance of creating an annual budget and forecast

Budgeting and forecasting for a business involves laying out the financial plan for the year to serve as a guide for the year ahead. It maps where they hope to go and how they’ll get there. However, not all companies engage in this exercise. And even those companies that do create these plans tend to make them, then put them in a drawer.

“Businesses benefit by seeing their budget and forecast as living tools to revisit and update as the year progresses,” says Samuel J. Agresti, Director at Brady Ware & Company. “Companies should always know their plan, their resources and where they’re going. Otherwise, even minor surprises could be disruptive to the business.”

Smart Business spoke with Agresti about the importance of budgeting and forecasting, and how to get the most out of the exercise.

What’s involved in the process?

The budgeting and forecasting process involves considering the prior year’s profits and losses, cash flow and balance sheet to set a plan for the year ahead. It’s also prudent to consider the macro-economic environment, as well as the realities of the local economic environment — where they are, where they might be — to gameplan how they might affect the business. For instance, inflation and rising interest rates may change the cost of materials as well as the cost of capital. Companies should understand their potential impact, as it will have a significant effect on their ability to act on opportunity.

It’s also a good time to conduct a sensitivity analysis that hypothesizes the best, most likely and worst-case scenarios and game planning what the company would need to do strategically to best handle each.

Who should contribute to the plan?

The CEO should communicate with the leadership team, as well as operations, sales, department heads and other key people inside the business to get input on their performance, needs and expectations.

Companies should also work with their advisory board to get feedback, and talk with their advisers, such as their accountant, banker, lawyer and other relevant service professionals, as they tend to have a broader perspective of the market and can offer valuable input.

Once the plan is finalized among those in the C-suite, it’s a good idea to share it with the relevant operations leaders, a step that can help smooth the implementation of any processes that may be unique to achieving the organization’s goals.

How long might the process take?

For a middle-market business, this process is likely to take about 30 days. In larger companies it could take several months. Through that time period a company should be able to get enough input, move through more than one draft of the proposed plans, have time to digest and discuss the ideas and then produce a final budget.

It’s ideal if companies can budget and forecast for a longer timeline — between three to five years. Looking across a longer time horizon creates an opportunity to look further out and set bigger-picture targets for the business or its owners. But with the uncertainty in the market, businesses should be prepared to pivot within their plan even as soon as three months.

While budgeting and forecasting are important exercises to prepare for the year ahead, business leaders should be conscious of analysis paralysis — being unable to make decisions because the team is overthinking the problem. A perfect budget and forecast are impossible. Instead, produce the best budget and forecast for the moment and adjust as situations change and more information becomes available.

A budget and forecast are living tools that should be revisited at least quarterly. It increases the likelihood that they stick to the plan they envisioned for themselves. There could also be significant events that impact the plan — the loss or gain of a significant new customer, a drastic change in the market, or some other material change to the business model may require the budget to be revisited and adjusted. ●

INSIGHTS Accounting is brought to you by Brady Ware & Company.

Samuel J. Agresti



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