• Matt Topham

Using budgets and forecasts to drive your business forwards



Budgets and forecasts are all views and predictions of what a business might do. They all have slightly different intentions and so being clear about which one is which will be really helpful to explaining your intentions to stakeholders and, more importantly, having them buy into your plans.


How to define your budget


A budget is the best guess at what the organisation will earn or spend without massive change or stress – depending on the organisation and where it is in its lifecycle, this could be last year minus 10% or it could be last year plus 30%.


The idea is that the budget allows stakeholders to plan their part in delivering the objectives encoded in the budget; the sales team can think about individual quotas, marketing know what their spend can be and what opportunities to deliver, operations know how many units to build or move or customers to service. It would be unusual to change your budget during the period; something would have gone horribly wrong to have press reset.

  • A budget is still the best guess of what will happen in the future but it will get out of date and the assumptions may not be valid. This means that just because it’s in the budget then you have to do something or, similarly, just because an opportunity wasn’t imagined in the budget then it doesn’t mean that the organisation shouldn’t seize it. “No plan of operations reaches with any certainty beyond the first encounter with the enemy's main force” (Helmuth von Moltke 1800–91).

  • Whilst this is a bit of a generalisation, if the budget is ordinary performance and bonuses (as opposed to sales commissions) are awarded for extraordinary performance, it would be odd to see bonuses in a budget. Clearly one size does not all here.


How to define your financial forecast

A forecast looks very much like a budget but it’s more likely to be during the year, or for a specific scenario; for example, a loss or win of a contract, a change in cost structure, or, very commonly, expected outturn for a financial year.

A rolling forecast is a version of the forecast which is likely to be focused on the outturn for the year or for the next 12 months but is integrated into your sales pipeline (plus some guesses) to give a dynamic view on where the business is going…and what needs to happen to make that [even] better.

And then there’s a target. In approach this is just another forecast scenario but its intent is much bolder. The business might set a budget of ordinary but the target is management saying that’s what we can do and how. The challenge for budget holders is personally identifying what extra they have to deliver with budget resources to win target resources to deliver target results!

Common challenges when creating a forecast:

  • Not having one financial model (Microsoft Excel or something even cleverer) that underpins all those possible scenarios and objectives. Having to rebuild something for each purpose just wastes time & effort (and losing commercial momentum). This model also needs to be a three statement model, include taxes and have sufficient controls that it adds up!

  • Struggling for agreement. There’s an engagement and training process to ensure that stakeholders have their say (and therefore buy into the answer and objectives).

  • Not having your management accounts for & KPIS clear. Having a poorly structured set of management accounts will hamper

  • Getting stuck at the 'unknowns'. There are some reasonable size guesses required but that’s okay.

  • The balance of detail. Forecasters can often struggle by getting bogged down in huge amounts of detail.

How to drive your business forwards using budgets and forecasts


1. Always be prepared. In a perfect world you’d work from home for the next 6 months and find some focussed time to develop the model that you need…okay, that may be more possible now than before but you still have the day job to do. The pragmatic way to start is by working on a monthly or quarterly outturn as part of the management reporting pack.


Start with the income statement (most of which probably doesn’t move around very much) and make some predictions around revenue and operational KPIs. Build out the balance sheet and controls as you have time. Not only will have serious value have been added to the current period but the right model and process will have evolved ready for next year. The chances are that you’re going to use a spreadsheet so don’t forget the principles of good spreadsheet design and to allow some space for obvious levers; examples are changes to price, volume, debtor days, or a percentage increase in payroll for an annual salary award.


2. Know your network. Knowing who to ask, how to ask , when to ask for confirmation of answers rather than asking questions is all part of knowing the organisation. If you don’t have a broad network then it’s worth inviting yourself to sit out in the organisation occasionally.


3. Get focussed. PCFO would argue (see our other blog) that the focus for management reporting & commentary should be the 3 to 5 most important metrics which are proven by the planning process. If you haven’t simplified and targeted your reporting pack then I’d suggest that might be worth doing before you build the forecasts unless there is a burning need to get the full forecasts away now (see point 1 above).


4. Be logical. In reality we will know most of the forecast lines or be able to use operational KPIs to modify the expenditure we have; for example, payroll probably stays reasonably stable. The hard number to estimate is revenue and this where the time should be spent. Some organisations have seasonality (which you can deduce from historic revenue), some don’t.


Some revenues stem from marketing conversions (so an LTV:CAC might be useful), some organisations have a field sales team and an estimate of meetings, gestation periods and conversion rates are needed. PCFO routinely does this with pre-revenue start ups (to pick an example where revenue will definitely be wrong and everything is an assumption) but by building up a logical progression will help get to a sensible answer. Use the KPIs to spot the glaring errors. If everything is supposition, run some scenarios to check what the most important levers are and see what you can benchmark.


5. Don't go too big on detail. There are two broad issues with too much detail (see our management accounting blog article). There’s now much more work to do to finalise the forecasts (having one category for Occupation probably does away with rent, rates, internet, insurance, phones, tea bags and wouldn‘t actually change the answer).


The senior people who need to buy into this plan are too usually too busy to do the detail

The ideal plan is just complicated enough to make it work but no more than that. If you can get away with revenue, cost of sales, payroll & overheads then great. In practice PCFO would split up overheads into key categories (sales & marketing, occupation, for example) and we are very keen to split different businesses up within a company; for example a software business will have operations (revenue, cost, overheads) and development (overheads) which have different economics and KPIs.

At PCFO, we provide outsourced Finance Director and CFO services, so we can help you create the best and most meaningful budgets and forecasts to enable growth and success. Find out more by contacting our team.

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