If you Google the most misunderstood words in the English language, some common results include ‘fulsome’ (which actually means insincere, not abundant praise)…
‘Ironic’ (famously misunderstood by Alanis Morissette)…
And ‘infamous’ (having a bad reputation – not being very famous!).
To these I would add two more words, which never appear on any list – but should.
I’m talking about ‘budget’ and ‘forecast’.
The first problem is, business owners often believe these are one and the same.
When you ask a business owner about their budget for the next year, they’ll often say something like: “We’re going to grow by 10%”.
This is actually closer to a forecast than a budget. But the second problem is that it’s not a proper forecast either, because a ‘real’ forecast is the result of analysis and calculation.
Meanwhile, that 10% figure is often produced almost randomly. It’s really just a wish or a goal that’s been committed to paper – “This is how much we want to grow”.
Then the company owners are shocked when this wish does not come true. “But it was in our budget…!”
So what is the truth about budgets and forecasts?
Here’s what I mean, when I talk about these two distinct concepts.
Done correctly, a budget is a planning process. When you budget, you, your directors and management team should be sitting down to discuss what you want to achieve with your business next year and sometimes beyond; what actions you will take to achieve those goals, who is responsible for achieving them and by when; as well as how all this could impact your people and operations and how you will adjust as a result.
Think of your budget as a business plan for the next 12 months, setting out exactly what you are going to do to generate the growth you want.
Your financial forecast is the financial result you’re going to see if you achieve your budgeted plan.
It’s not a stand-alone number plucked from mid-air or a wish, but the direct consequence of your budget plan. And that’s also why this kind of forecast – as opposed to the ‘misunderstood’ type – has a higher likelihood of coming true. It’s backed by a to-do list.
That said, often the forecast needs adjustment and re-adjustment during the year, when you measure it against your actual performance. But that doesn’t make it irrelevant or not useful.
I find that the value of budgeting and forecasting is in the planning process.
That act of sitting down together to think deeply about “what’s next” is hugely helpful, because it makes you consider your strengths and weaknesses, and see your operations in a new light. It gives you strategic direction going forward, so all your actions and spending are well-thought-through, coordinated and deliberate – making them more effective.
And with a clear benchmark for how you thought you were going to perform, it’s easier to see when you’re blown off course, and make adjustments.
If that’s the kind of budgeting and forecasting process you’d like for your business, please get in touch today. This is all part of our financial management service, where we help companies like yours manage their money to world-class standards, so you can maximise profitability and grow faster.
Simply call us on 01279 647 447 or email me back to find out more about how we can help you.
Warmly,
Garry
