A New Year Ahead - Time For A New Budget And Forecast

With a new year just around the corner it's time to turn our attention to budgets and forecasts for the year ahead. For many the focus in recent years has been on survival and cash flow continues to be a challenge. But, while times are still difficult there are signs of a sustainable recovery.

Accurate budgeting and forecasting can alert a business to opportunities arising in a changing environment, this in turn gives a business the chance to take advantage at the earliest possible opportunity and gain a competitive advantage.

Sales rise and fall, markets fluctuate. This constant change makes it difficult to cater for all potential eventualities. However, the need for flexibility does not excuse a lack of forward planning. Businesses should do all they can to plan for the ups and downs of the economic cycle, thus avoiding the pitfalls associated with fluctuations in trading and cash flow difficulties. The primary driver of such planning is the budgeting and forecasting process.

As well as being an essential part of the business and scenario planning process, budgets and forecasts are a key risk management tool in your business. Budgets are typically fixed in advance and remain static for the duration of a selected period. They provide management with the ability to identify how and, more importantly, why actual results differ from those that were originally expected. By referencing the actual results against the assumptions used in the budgeting process the reason for the divergence can be analysed. It may be that margins varied from those predicted at the outset of the period; perhaps an unwelcome bad debt arose; there may have been unexpected currency fluctuations; overheads may be out of line with predictions. A business must be alive to changes in the business environment and to the accuracy of management's own assumptions if it is to thrive and to grow its business.

It is a reality that budgets and forecasts have both an internal and an external audience. A business's bankers are likely to demand access to both. While there may be a temptation on the part of a business to tend towards the optimistic end of possible scenarios in the hope of impressing the bank, such an approach runs the risk of being counter-productive over time. Over-optimistic budgeting and forecasts militate against good business husbandry. Furthermore, the bankers will quickly lose confidence in a business that constantly fails to live up to its own forecasts.

While...