From Budgeting To Forecasting: Why The Future Is More Important Than The Past

Budgets are tricky documents. They have been part of business vernacular for a long time and have given an illusion of control to those businesses who rely on them.

In periods of relative stability in a business’ operating environment, they can be useful. However, how much stability can you recall in the last 10-15 years?

Much of this period has been characterized by change, volatility and uncertainty. And in these environments, budgets have very limited information value.

Enter forecasts.

Forecasts are more flexible than budgets

A budget is static by its nature. It’s worked on, sometimes for months and well in advance of the time period it covers, and then it is essentially chiselled in stone.

The reality is that the business is always changing, and it is constantly subjected to plot twist – whether they be chosen or unexpected.

Forecasts are dynamic; they are living documents that are adjusted as new information becomes available. This doesn’t just mean external inputs, but also internal responses to those inputs that allow businesses to manage operations and profitability proactively and use the forecasting process as an engaging, strategic activity as opposed to an administrative and operational one.

Forecasts are more relevant than budgets

Because budgets are set once approved, and used as a measuring stick throughout the fiscal period, as time goes on, they become further removed from reality and usually do not accurately portray various changes in the business and its operating environment.

Forecasts amalgamate actual operating results (up to and including the most recent reporting period) and add our best estimate of the remainder of the year, so they naturally reflect more and more of a business’ actual results as time goes on, making them far more relevant to leadership as a decision-making tool.

Forecasts provide more insights than budgets

Given the dynamic nature of forecasts, when actuals are compared to forecasts, it yields more insight as to where the business may have missed the mark. After all, the projection was adjusted so recently that if the result is much different, understanding the variance will lead to insights that can be directly applied to the current or following periods. This often means any variance analysis discussions tend to be strategic and actionable in nature, as opposed to reconciliatory to a dated document.

Forecasts help businesses stay agile

Forecast inputs are revisited regularly and as such, there is a recurring opportunity to question, confirm, and validate inputs.

As inputs are vetted, issues can surface that may otherwise remain hidden and therefore provide early warning signs of potential issues or prospects. In a competitive market, it’s hard to be too quick to remedy problems or take advantage of opportunities.  

Final thoughts…

Budgets may still have their space and place, but every business should engage in regular forecasting. By providing more flexibility, relevance, insight and agility, forecasts can help businesses make informed decisions to stay at the forefront of their competitive landscape.

For more information on how to implement, revamp or fine-tune your forecasting capabilities, contact us.