As a business owner, you probably are familiar with these two words: budgeting and forecasting. But what do they mean? Budgeting involves creating a detailed plan for income and expenses over a specific period, such as a month, quarter, or year. A budget typically includes projected revenue, costs, and expenses, broken down into specific categories such as salaries, rent, utilities, and supplies.
Forecasting involves predicting future business performance, such as revenue growth, market trends, and cash flow. A forecast can be based on historical data, current trends, or both. Generally speaking, there are two responses from business owners regarding the matter of budgeting and forecasting:
1. Those who see it as an essential part of their business planning and decision-making process, or
2. Those who find it a tedious and time-consuming task (if you are in this category and do not have a qualified in-house accountant, it is highly recommended to consider hiring an outsourced staff accountant, for reasons we will mention later).
Regardless of your feelings about this task, budgeting, and forecasting are crucial tools for managing finances, planning for the future, and making informed decisions.
In small businesses, the responsibility of budgeting and forecasting may fall on the owner or manager, who may need to work with an accountant or financial advisor. The reality is that most small business owners have little to no training in bookkeeping. Hence, taking on the responsibility of budgeting and forecasting seems daunting, and hiring a full-time in-house accountant may be out of the budget, so they often put it off and just hope for the best. This leads to discovering problems when it is too late.
According to BLS data, nearly 20% of businesses fail within the first year, and by year five, the failure rate has increased to almost 50%. And according to a study by Jessie Hagen of the U.S. Bank, 82% of businesses fail due to poor cash flow management. And guess what? Budgeting and forecasting are key to managing cash flow.
Budgeting and forecasting are critical for small businesses for several reasons:
1. Planning for the future: Budgeting and forecasting allow you, the business owner, to plan for the future by projecting revenue, expenses, and cash flow. This is essential in making informed investment decisions, hiring, and other strategic initiatives.
2. Managing cash flow: You can avoid cash shortages by creating a budget and forecasting future expenses and revenue.
3. Identifying potential problems: Budgeting and forecasting can help small businesses identify problems before they occur. You can identify areas of overspending or underperforming and take corrective action before it is too late.
4. Tracking progress: Creating a budget and forecast allows you to track your company’s progress over time. You can see how your company performs against the projections and adjust as needed.
5. Securing financing: Securing financing is getting harder and harder during a financial downturn, and many lenders and investors are tightening the requirements. Having a solid budget and forecasting plan in place can increase your chances of securing financing.
But What If I Don’t Have An Accountant
By now, we can all agree that budgeting and forecasting are essential to the survival of all businesses. You are on board but overwhelmed. You are unsure where to begin, and hiring a full-time in-house accountant or having a full-blown accounting department may not be in your best interest right now. The perfect solution is to hire an outsourced staff accountant. The outsourced staff accountant is becoming more popular, particularly in small and medium-sized enterprises, due to the variety of services provided and the cost-savings.
So, don’t put it off any longer; it is time to tackle this task head-on and take your business to the next level.