Three Budget Methods for Forecasting

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OH MY GOD, THREE BUDGETS/FORECASTS

There are three types of financial forecasts I have seen over the years. Don't become anxious; you’ll only deal with two. Make it easy on yourself. Get someone else to prepare them. If you take the approach of someone else doing the budget/forecast, then you must be involved in the process. Only you can determine the assumptions to be used in the budget/forecast development.

Delegate the task to a bookkeeper who searches for every penny in balancing the accounts, or some new hire who wants to impress the boss. Find someone you can trust and let that person assist you in this vital work. You will make all the decisions regarding the plan assumptions. The clerk handles the details. And best of all, I have developed a software program that will do it all for you. It’s much easier than struggling with a complicated spread sheet program.

DON'T FORGET A PROFIT

You must not only prepare a dynamic financial budget/forecast of future events, but you must make certain the plan will produce a profit. Treat profit as if it were any other expense of the business. Most entrepreneurial companies simply don't have the net worth, resources, or clout to sustain losses. It makes no sense to budget/forecast a loss. If the budget/forecast looks like you’ll be operating at a loss over the next twelve months, change the way you will operate the business now before it’s too late.

Profit and positive cash flow is the name of the game.

BUDGETS/FORECAST NUMBER 1—THE PIE IN THE SKY BUDGETS/FORECAST

This budget/forecast, generally prepared for bankers and other financiers, usually promises high sales, low expenses, and large profits. It may be helpful in securing loans or investors, but forget about it as a management tool. It's not only a pie in the sky budget/forecast, but also a Who do we think we are kidding budget/forecast?

By the way; most good financial people will know the game you are playing; don't waste your time. Put it in your drawer and leave it there. Our management tool is budget/forecast No. 2.

budget/forecast NUMBER 2—THE I HOPE AND PRAY TO GOD I MAKE IT budget/forecast

Achievable sales, honest operating expenses, and reasonable profits: This is reality. The budget/forecast we are going to hang our hats on. The one we will make all efforts to achieve, so that we never have to use budget/forecast No. 3.

BUDGETS/FORECAST NUMBER THREE—THE I HOPE AND PRAY TO GOD I NEVER USE IT BUDGETS/FORECAST

This is the budget/forecast for survival. If you cannot reach expected results, move into a survival mode.

I absolutely recommend a worse case scenario budget/forecast. Most entrepreneurs operating small businesses generally do not react to changes in economic conditions on a timely basis. Prices increase, yet increasing sales prices lag well behind increases in the cost of doing business. I have seen it time and again. Large companies hire specialists, who attempt to predict economic future and may also employ large staffs to prepare budget/forecasts based on predicted economic trends. This gives them a sub-stantial edge in making it through hard times. We have no such advantage. Our edge is ourselves.

We make economic predictions based on gut feelings and seat-of-the-pants planning. It is absolutely necessary for us to react to changing conditions as quickly as possible. What do we do when our loan interest rates jump several points, expenses rise, sales are cut in half, and cash flow dries up? We must prepare for the worst well in advance.
The key triggering mechanism for going from a realistic budget/forecast to the survival mode is a sudden or steady decline in sales. When things change, your best friend will be your budget/forecast, assuming it can be revised for different levels of sales, expense and/or costs. If your sales are in decline, and you can quickly adjust your budget/forecast this will give you an immediate view of the future and allow for a quick response to changing economic conditions.

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