The importance of budgeting and forecasting in the business process can not be overemphasized. Budgeting helps the company benchmark its performance and allows it to measure its performance against expectations.
Despite the importance of budgeting, it shouldn't be set in stone. The team shouldn't expect everything to go as planned throughout the fiscal year. Certain unforeseen situations may arise within the year that necessitates annual budget adjustments.
Budget forecasting is necessary to protect the company against avoidable foreclosures.
What is reforecasting?
Reforecasting in accounting refers to holistically reviewing an existing budget to accommodate significant changes in the projected revenue and expenditure.
Budget forecasting and reforecasting is a "planning to replan" approach employed by a company to plan its finances ahead to effectively manage changes that might affect the annual budget and planning.
It helps keep the organization's plan in line with its financial position to ensure it meets its goals.
Reforcasting doesn't just alter one item; it reviews the whole budget to give a clearer picture of all areas that require changes. The newly reforecasted budget relies on year-to-date figures and projections for the remaining fiscal year to help the company make necessary adjustments.
Reforecast Vs Budget
A budget is an assumption of expected revenue and expenditure throughout the fiscal year. It's a financial plan that helps the company set targets on revenue, cash flow, and expected performance based on strategic planning, and all teams work towards achieving the aim of the budget.
Reforecasting processes exist to ensure the company's projected budget is in line with actual results. It reviews the budget from time to time to adjust the figures in line with significant changes in the business environment.
While reforecasting is a continuous process, the budget is typically done once at the beginning of the fiscal year. Reforecasting does not alter the original budget but a copy of it. The original budget will be preserved for record and end-of-the-year benchmarking purposes.
Why do companies reforecast their budget?
The business environment is dynamic. A lot of turbulence might have happened within the fiscal year that calls for adjustment of the initially forecasted budget.
Reforecasting allows for alterations and management key decision making that considers shifts in business trends and new information.
As opposed to static budgets that remain unchanged throughout the year, the reforecasted budget is a rolling budget. It helps organize your plan by taking cognizance of external and internal assumption changes and unforeseen circumstances that were not accounted for during the budgeting process.
Most companies find it daunting to revisit their annual budget after setting it at the beginning of the year. However, it begs the question of how they account for changes occurring within the year that might have rendered those initial figures useless.
KPMG surveyed 544 global companies in 2016. Only two third of the surveyed companies incorporated reforecasting into their budgeting culture.
Even though a static budget may be a valuable tool for benchmarking revenue and expenditure, it will only be helpful if all predictions remain unchanged. The budget may become useless when the company experiences significant changes that were not accounted for.
The 2020 COVID-19 pandemic is one unexpected shock that called for the company's annual budget revision.
When to reforecast
Budget reforecasting occurs when changes have occurred, not in anticipation of an unexpected situation. Different signals indicate the need to reforecast;
Changes in budget Vs actual performance
Regularly comparing the forecasted budget against the actual performance is essential to stay on track throughout the fiscal year. If you notice a significant deviation in your revenue and expenditure after conducting a variation analysis of your budget and actual, you might need to review and reforecast your budget. In such cases, the key performance indicators values in the budget will no longer be valuable.
Organizations can review and reforecast their budget monthly or quarterly to reflect significant changes between budget and actuals.
A major change to a critical budget driver
A significant change to one of the main drivers of your budget is a signal that you need to review your original budget. A unique funding challenge is a typical example of key budget driven. Suppose you expect a certain amount of funds from your investors for a particular project. In that case, If you fall short of your targeted funds, you may need to take a fresh look at your projected expenses and make adjustments taking into account that unexpected change.
Other situations that may necessitate reforecating include;
- Change in federal or state business regulation
- Disruption of significant supply chain
- Fire outbreak in the company or warehouse
- Delayed product launch
- Unexpected acquisition of a rival company
- Stock market crash
Importance of budget forecasting
Reforecasting is not just about adjusting numbers on the budget; it points the business in the right direction. Incorporating changing business trends into your budget can provide critical data required by the senior management to make effective decisions.
Budget reforecasting can aid the board's decision-making on crucial issues such as the budget deficit, budget surplus, staff recruitment, remuneration, and benefits.
How to reforecast your budget
Depending on your business size, you may use a simple excel spreadsheet or budget forecast template.
Forecast templates can help you forecast your future revenue and expenditure. If your business sells one product or renders one major service, the sales team can use a sales forecast template to predict the future performance of your product or service (i.e., the revenue and expense line items related to that particular product or service). The forecast will provide insight that will affect sales teams key decisions. They can also identify warning signals in their sales pipeline earlier and make corrections before it's too late.
For larger businesses with multiple departments, products, and services, it is better to use accounting software to automate the process. Manually entering data into spreadsheets and transferring them may be cumbersome.
How to create a forecast template in Excel
- Open a spreadsheet.
- Enter two corresponding data series in the worksheet. The value of these series will be forecasted for future dates.
- Select the two data series.
- On the data tab, you will find the forecast group. Click the forecast sheet.
- For the visual representation of the forecast, in the "Create Forecast Worksheet" box, choose either a column chart or line chart.
- In the forecast end box, pick an end date, and click create. Excel will create a new worksheet that contains historical and predicted data and a chart that expresses the data.
A 12-month rolling forecast model
A rolling forecast is the best approach to give room for changes in your initial budget. A 12-month rolling reforecast enables continuous forecasting throughout the fiscal year by adding one month to the forecast period every time a month is closed.
A 12-month rolling forecast model is efficient because it continuously considers ever-changing internal and external business environments.
How do you do a 12-month sales forecast?
You can utilize the following steps to create 12 months rolling forecast;
Start with your revenue
To get started, perform an analysis of your sales and marketing models.
Build a headcount plan
Make a list of all your staff with their wages and roles. Make provision for future recruitment since you can't tell if you may need to replace some employees or expand your team. As such, add a placeholder to remuneration to the estimated future hires.
Peg working capital and cost to revenue
Due to revenue fluctuations, your
accounts payable, accounts receivable, inventory levels, variable costs, and other balance sheet items will change. These accounts will be able to respond to changes in business conditions by using relevant formulas to tie them to the revenue.
Create three financial statements
An accurate budget forecast will include a balance sheet, income statement( profit and loss account), and statement of cash flows. Your cash projection will be faulty if you exclude these financial reports.
Incorporate historical financial
You need to incorporate historical figures to reflect actual results. To do this, open two tabs in your excel sheet, one for the balance sheet and the other for the profit and loss statement. To update the forecast, anytime you add a new set of financials; it is best to use groupings, labels, and formulas.
To ensure the reasonableness of your forecast, test your prediction by breaking the model and adjusting the variables. This step will ensure your continuous projection responds appropriately to business changes. To test for reasonableness, you can ask the following questions;
- What will be the impact of adding more employees?
- What will happen if there is a shortfall in expected funding?
- What if we increase our sales by 50%?
- What if there is another global pandemic, and we must adjust our business model?
Reforecasting best practices
Budget reforecasting may appear cumbersome, but you can simplify the process with the right tools.
To effectively reforecasting your budget, you can follow these practices;
Add operational drivers where relevant
Reforecast major revenue and expenses with data drivers like enrollment information for room and board, tuition and employee salary, and benefits expenses.
The process may require certain assumptions to forecast specific outcomes effectively.
Project line of items with defined formulas
Use a consistently tested formula to calculate the difference between the original and new forecasts so that the comparison can be easy to understand. Also, you should document the assumptions you utilized as a framework for planning in case you need to adjust them.
You can use any of these formulas;
1. Forecast total = actuals to date + prior year actuals in remaining months.
2. Forecast total = actuals to date + remaining budget months.
Consistently track your data
Reforecasting is not a one-off approach. You should continuously track critical data to ensure your reforecast aligns with changing circumstances. To keep your company on track, you may need to repeat your reforecasting process if you discover your last reforecast is holding up against significant business disruptions.
Include all necessary stakeholders in the conversation
Ensure you include all stakeholders in the conversation. All concerned departments should be able to adjust the budget to reflect their unique departmental needs that may not be reflected in the reforecasted budget.
According to experts, a budget is a living document that should be shared widely with everyone who has information that affects the budget outcome. To create a fuller picture of the budget, you should include certain departments or officials who may have particular funding needs and challenges that are not incorporated in the budget.
Automate the reforecating process
You can streamline and accelerate your reforecasting process by using online accounting software. While manually reforecasting your budget may take days, you can use accounting software to automate the process in minutes.
Automation helps with uploading accurate budgets, actuals, and historical data. Front loading these values will ease your workload during subsequent forecasts. Automation can also help calculate and highlight your key variances.
You can create multiple case scenarios such as Worst Case", "Best Case," "or "Likely" forecast scenarios. These scenarios can help you prepare effectively for unforeseen circumstances without needing to reforecast frequently.
You can either get accounting software to facilitate an effective reforecasting process or use a third-party financial services firm that utilizes excellent accounting software.
Whether a private or public company, reforecasting enables businesses to continually respond to changes without deviating from their goals.