12 May

What’s the difference between Forecasts and Budgets

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Budgets


Budgeting should not be confused to forecasting. Forecasting is normally done for investors and information is disclosed differently to a company’s budget.


Each year an entrepreneur should produce budgets. When preparing year on year budgets the following should be taken into consideration:

 

  • How much do think your sales will increase by and why;
  • Can you improve your margins and how will you achieve this;
  • Have you made enough provision for increase in costs;
  • Have you covered all incidentals?


Record all your assumptions. When you compare the management accounts’ to your budgets, it will be useful to revisit your assumptions and adjust accordingly. After a few years, your budgets will become accurate due to the fine tuning of your assumptions.


Forecasts


If you are a start-up, preparing your five year forecasts can be a very difficult task. Entrepreneurs are positive individuals and always set their forecasts high. When preparing forecasts, the following has to be taken into consideration:

 

  • What is the market size and how much of that market do you want to capture;
  • How do you plan to capture the forecasted market share;
  • Is it a realistic expectation;
  • Have you taken all the potential pitfalls into consideration;
  • Have you covered all your costs;
  • Are your margins reasonable and have you taken potential price increases into consideration?


Always back your forecast with proper research and references. Do not make broad statements, be specific with solid facts.  List all your assumptions and be very clear as to why you have decided on the various costs. It is also a good idea to have professionals look at your forecasts and obtain written opinions that the assumptions are reasonable.


Once you’re happy that you have taken everything into consideration, half all your turnover and adjust accordingly! Investors will use the forecasts to decide on a valuation for your project. Your credibility will be greatly enhanced if you meet your forecasts. That will make it easier for second round investment.


The above analysis is obviously the tip of the iceberg. This blog is to assist you in getting you motivated to do budgets and forecasts. If you’re stuck, chat to us, we can help.

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Read 10000 times Last modified on Monday, 12 May 2014 09:36
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