The Business Owner’s Guide to Understanding Budgeting and Forecasts

Let’s talk about your budget. Now, when I bring up that word for some of my clients, they think I’m a “bean counter” who’s going to tell them how many paper clips they can buy in a year. But I’m really talking about a very effective tool for management and for planning for the small business owner.

Why Budgeting is Your Secret Weapon

When we prepare a budget, it forces discipline in our thinking. We look ahead and make predictions and forecasts about revenue and about expenses: we build a budget for how we think the future is going to perform.

As we go throughout the year, we can compare what actually occurred with what we thought was going to occur. It’s that analysis of the “delta” between reality and our plan where the business owner magic occurs:

• That’s where learning occurs.

• That’s where we learn how to improve gradually over time.

• That’s how we improve the bottom line.

Understanding the Forecast “Cousin”

I also want to talk about forecasts. Forecasts have a cousin called budgets, but in my mind, a budget and a forecast are not exactly the same thing. A forecast is a prediction about what will happen: we are taking what we know today and making projections into the future.

A business can use many different types of forecasts:

• Cash Flow: Predicting the movement of money.

• Revenue: Forecasting your upcoming sales.

• Marketing Action: Projecting the impact of your outreach.

Turning Predictions Into Plans

If we can make projections that are consistently fairly accurate… let’s say plus or minus 10% of what actually happens… then we have created an incredibly valuable tool to manage our business.

Consistency allows us to observe what’s happening today and make intelligent, well-thought-out, and meaningful plans about what we want to happen tomorrow. That’s the true value in a good forecasting tool.