Introduction

Budgets and Forecasts are predictions of future income and expenses and cash flow. They also predict future performance with financial forecasts and projections and with financial models.

Why Budget and Forecast? Budgets and forecasts provide a feasibility analysis. They can help develop a business model, review the company’s key assumptions, and identify resource and capital needs. Budgets and forecasts can be used to find funding. They demonstrate the potential of the business to investors and lenders. Budgets and forecasts can also be used as a management tool. They can help the organization establish milestones and require accountability for accomplishing the milestones. They can help identify risks and show benchmarks. This will help business owners make the necessary adjustments to avoid the risks, to reach the milestones, and to measure up to benchmarks.

Forecasts are important because it can establish measurements to guide management, to facilitate planning, and to facilitate goal setting. As part of the forecasts, the company will review key concepts and issues that will make a difference in the company’s survival. The company also needs to forecast the resources it will need and set up a schedule for using and replenishing it’s resources.

For years, companies have viewed their budgets and forecast simply as a mandatory estimate of the upcoming year’s revenues and expenses. However, this attitude is quickly changing as the marketplace becomes more competitive and organizations become more dynamic. Successful companies are constantly improving their ability to accurately predict their future operations and their related resource requirements. Not only does this heighten the importance of the budgeting and planning process, but it also changes the traditional roles of spreadsheets, legacy budget systems, and software created in-house.
Applying Budget and Forecasting to a Proper Situation

The Telecommunications Company that I worked for is a results-driven company. We are never satisfied with our performance and always committed to achieving better and greater things. The company’s success depends on our employees performing at the top of their game each and every day.

Though I am not from the Sales Department, I was able to gather some research about the budgeting and forecasting of our Sales Group Personnel. One important forecast is the total personnel required to support the company’s desired revenue from sales. The company’s revenues result from sales thus the company should start with the desired revenue in year 5. From year 5 subtract 40% from each prior year. On the basis of the research, estimate the number of sales each sales person will make each year. From that the sales group can calculate number of salespeople required.

After my organization make the forecast, the department will complete a sensitivity analysis by adjusting each major item estimated by 10% plus or minus. Examine the impact on revenues, profit, and cash needs. Remember that most operating expenses are roughly proportional to personnel headcount. These are the company’s variable expenses such as salaries, benefits, employment taxes, furniture, computers, rent, supplies, utilities, training, travel, meals, training, and dues. Other non-variable expenses may or may not be proportional such as professional services, subcontractors, advertising, and trade shows.

The company uses the forecasts to compare to others in the industry by such things as revenue per employee, revenue per salesperson, gross margin, expense categories as a percentage of revenues, financial ratios, and inventory control. It is critical that the company knows the industry’s benchmarks and metrics and that the business forecasts are within these benchmarks and metrics.

The Benefits for the Company

Forecasting is very beneficial to my organization. The end-result itself can sometimes be valuable, because an accurate forecast may improve the quality of the plan(s) based on it. It may help identify and evaluate risks, clarifying factors and reveal assumptions.

More often it is the forecasting process that is valuable, because it sensitizes managers to change and to the relevant factors, helps them understand what is likely to occur, and builds a consensus.

Sometimes the consensus is crucial. The fact that everybody has agreed on a forecast may be more important than its accuracy. Particularly if the consensus involves many organizations or units, crossing organizational and cultural barriers.