Once a business has monthly data it becomes easy to forecast and prepare budgets. The preparation of the annual budget has been detailed in previous blogs so here we will concentrate on forecasting.
Why prepare a forecast? The reason for a preparing a forecast is to try and manage any nasty surprises which may hit the business e.g. running out of money. Forecasts are usually prepared quarterly and take into account any changes which have occurred since the budget was prepared and signed off.
In forecasting the monthly actuals are substituted for the budget figures so that initially:
X Months Actuals + Y Months Budget = Forecast
The monthly actual results cannot be changed but where it is known costs will change in the future e.g. an increase in rent the budget figures are superseded and become forecast figures.
In respect of revenue where it is known that the business has won/lost a contract or sales are better/worse than expected then this change needs to be reflected in the forecast and so:
X Months Actuals + Y Months Budget updated for revenue/costs = Forecast
The forecast for the remaining months of the financial year should be as close to the actuals as possible when they occur. Forecasting tends to become easier as the end of the financial year approaches.
Other reasons for preparing a forecast include:
• To gain a better view of the cash flow of the business and plan accordingly
• To look at stock levels to see if there is enough stock for the expected sales and if not, decide when is the best time to place orders with suppliers taking into account the lead times
• To forecast the corporation tax charge and dividends