Starting a new business venture whether it be a side hustle or going in full time can be an exciting and challenging experience. You may have a great business idea and a passion for bringing it to life but the success often depends on effective planning and execution.

One critical aspect of effective planning is creating a budget and forecast for your new venture. Both tools are essential for understanding the financial viability of your business, identifying potential risk and opportunities, and making sound decisions to help your venture succeed.

If you haven’t checked out our previous blogs on various business structures like Sole Proprietorship, Partnership and Corporation, then make sure to check it out since you will need to select one.

In this blog post, we’ll explore the basics of budgeting and forecasting, the factors to consider when creating a budget and forecast and provide tips to help you create accurate and realistic financial plans.

Let’s get started!

What is a Budget and Why is it Important?

A budget is a financial plan that outlines how much money a company expects to earn and spend over a specific period. It helps businesses understand their cash flow, allocate resources, and make informed decisions to achieve their financial goals.

It typically includes estimates of the revenue, expenses and profits and can be used to track spending, manage cash flow and plan for future growth. These are usually prepared for one year or longer and is a static financial plan.

By creating and adhering to a budget, businesses can ensure that they are operating within their means, avoid financial risks and make strategic investments to support their long-term success. The focus here is more on the day-to-day operations and helping businesses stay on track financially.

Types of Budgets

There are several types of budgets and each may have a different name depending on what industry you’re in but since this blog is for your business venture, let’s go with the most common types:

Operating Budget

This budget outlines a company’s expected revenue and expenses for a specific period which could be monthly, quarterly, annually, or another frequency. It helps businesses track their financial performance and identify possible opportunities to improve profitability.

Capital Budget

This budget focuses on the company’s long-term investments. For example, purchasing equipment, constructing a facility for use in operations or even research and development on a new product. It helps businesses plan for major capital expenditures and allocate resources strategically.

Cash Budget

This budget tracks the inflows and outflows of cash over a specific period which could be monthly, quarterly, annually, or another frequency. It helps businesses manage their cash flow effectively and avoid cash shortages or excessive borrowing.

Master Budget

This budget integrates all the other budgets and financial plans into one comprehensive document. These numbers roll into the Financial Statements on the budget which consists of the Balance Sheet, Income Statement and Cash Flow Statement. It provides a clear overview of the company’s financial position and helps businesses make informed decisions about resource allocation and goal setting.

Steps to Create a Budget

Creating a budget for your business venture can be a daunting task but it’s a crucial step in planning for financial success. Here are 6 steps to follow when creating a budget:

#1: Identify your Revenue Sources

How much revenue and gross profit do you expect to generate from sales, investments and other sources? If you are planning a product-based business, it may be necessary to break these down by product since you want to know which products will generate a profit and which won’t. Even if you are planning a service-based business, it will be the same thing.

#2: Estimate your Expenses

The focus here is on operating expenses since expenses incurred when you sell a product or service are covered in #1 above. Some examples of operating expenses include: rent, salaries (for non-revenue generating activities), utilities, office supplies, and marketing expenses.

#3: Determine your One-Time Costs

These costs are usually paid once and are non-recurring. For example, start-up costs depending on your business structure like Sole Proprietorship, Partnership or Corporation which may include legal and/or accounting fees. Another example could be cost of equipment.

#4: Determine your Profit or Loss

Depending on your revenue sources, expenses and one-time costs that you compiled above, you can calculate your expected profit or loss by taking your revenue and subtracting your expenses. This will take the form of an Income Statement.

#5: Set Realistic Goals

The budget is the basis for you to set realistic financial goals for your business. It’s important to be realistic with all the assumptions you used above otherwise this exercise didn’t help you to plan for financial success. For example, you can set a goal of when to breakeven or how much profit you want to achieve by a certain period.

#6: Monitor your Budget

You can’t measure what you can’t track! On an ongoing basis, make sure to monitor your budget against your actual revenue and costs to see how accurate or not your budget was. Based on the findings, you can either update your budget to reflect the changes or you can make changes to your operations or even both.

What is a Forecast and Why is it Important?

A forecast is a financial projection or estimate of future performance based on historical data, market trends, and other relevant factors. It helps businesses anticipate and plan for future outcomes such as sales, revenue, expenses and cash flow.

Businesses can use these factors to make sound decisions about resource allocation, expansion strategies and overall business growth. This tool also helps you to set realistic targets, identifying potential risks and opportunities and helps with strategic planning.

Forecasts are also invaluable in securing financing and attracting investors because they often require a clear understanding of a company’s projected financial performance. A well prepared forecast can increase credibility and confidence in the eyes of potential stakeholders.

Types of Forecasts

In business planning, various types of forecasts are utilized to project future performance and guide sound decision-making. They assist in understanding market trends and predicting financial outcomes. Here are some common types of forecasts:

Sales Forecast

A sales forecast predicts future sales levels by considering historical sales data, market trends and customer demand. It helps businesses estimate revenue, plan production levels, set sales targets and make decisions about pricing.

Staffing Forecast

A staffing forecast estimates future workforce needs based on projected business growth, industry demands and internal workforce analysis. This helps with workforce planning, hiring decisions and resource allocation for efficient operations.

Expense Forecast

There are two parts to an expense forecast. First, it estimates future operating expenses such as salaries, rent and utilities. Keep in mind that these are operating expenses which are considered non-revenue generating activities. Make sure to consider Payroll Burdens as this is usually a significant additional cost.

The second part are the costs associated with the revenue generating activities (ie. The cost incurred to sell a product or service). These expenses usually correlates to your Sales Forecast because if you sell additional products or services, your expenses related to these would also increase.

Financial Forecast

A financial forecast projects a company’s financial performance which includes the revenue, expenses, profits and cash flow. It is a combination of all of the forecasts above and it assists in assessing financial health, identifying potential funding needs and making informed decisions about budgeting and resource allocation.

Steps to Create a Forecast

Creating a forecast for your business venture can be a daunting task but it’s a crucial step in planning for financial success. Here are 8 steps to follow when creating a forecast:

#1: Define the Objective

Make sure to identify the purpose of the forecast. Maybe you want to do one just for the revenue projection or maybe a market demand analysis. It’s to ensure that your analysis is laser focused.

#2: Gather Relevant Data

Collect historical data related to the specific area you’re forecasting based on the objective you defined. This can include retrieving the financial statements, industry trends or even historical sales figures.

#3: Identify Key Drivers

Identify the key factors that influence the area you’re forecasting. For example, if you are forecasting sales, key factors may include customer demand, pricing or even internal business performance.

#4: Develop Assumptions

Based on the key drivers, make informed assumptions about future trends and events that will impact your forecast. A forecast is about the future which is based on assumptions but it’s important to ensure that these assumptions are realistic. An educated guess based on data is always better than a guess.

#5: Apply Forecasting Methods

There are various forecasting methods that are available but choose one that is aligned with your objective, key drivers, assumptions and data you collected. Some examples include trend analysis, extrapolation techniques, moving averages or scenario analysis. You may also want to use a combination of these tools.

#6: Analyze and Validate the Forecast

Assess the results of your forecast and perform a comprehensive analysis. Compare these figures against historical data and industry benchmarks to confirm the accuracy of your forecast.

#7: Adjust and Refine

If you come across new or additional information or even changing circumstances that will cause your forecast to change, make sure to update your forecast to properly reflect it. Think about your forecast being on a moving train, the numbers will continually change.

#8: Communicate and Monitor

If there are multiple internal stakeholders involved, clearly communicate the forecast to them and monitor actual performance against the forecast regularly. If there are any variances, identify why there is a variance. Maybe your forecast needs to be updated because a supplier suddenly increased their prices causing your gross margin to be lower or maybe something was allocated to the incorrect bucket.

Factors to Consider when Preparing a Budget and Forecast

Now that we went through what a budget and forecast is, why they are important and steps on how to create one, let’s go into some critical factors to consider when preparing one.

Business Goals and Objectives

Make sure to align the budget and forecast with your business goals and objectives because you want to ensure that the financial projections support your long-term vision for your business venture as well as any strategic initiatives.

Start-up Costs

Estimate and account for all start-up costs that you may need to incur. If this is a new business venture, you will need to select a business structure whether it be a Sole Proprietorship, Partnership or Corporation. Other examples include professional fees, equipment purchases, initial purchase of inventory, any market research if you need to pay for it or even insurance. Make sure to include all start up costs so you would have an idea how much you need to put in initially.

Sales and Revenue Projections

Based on the data you have gathered, it’s essential to develop realistic sales and revenue projections. The key word here is realistic as being overly optimistic may yield a negative result. If the actual results match to your overly optimistic projections, that’s great! But what if it doesn’t?

Operating Expenses

Identify all of the operating expenses that you may need to incur during the start-up stage and ongoing as well. These expenses usually fall into 2 main categories: fixed expenses (ie. office rent or utilities) and variable expenses (ie. Office supplies or marketing). An effective part of a budget and forecast is ensuring that you have captured the expenses accurately.

Financing Options

At some point in your business, you may need financing to support your growth so it’s important to assess your financing options and their impact on the budget and forecast. Different funding sources have different terms and costs so it’s about selecting the most suitable strategy for your business. They can be Traditional Bank Loans, Government-backed Financing or Alternative Financing options.

Risk Assessment

When you prepare a budget and forecast, it’s impossible to be 100% accurate because you would have used assumptions. These potential risks and uncertainties may impact what you have prepared so it’s important to develop contingency plans to mitigate these risks. It might just be a matter of being more conservative in your numbers.

Monitoring and Review

You can’t measure what you can’t track! It’s not set and forget. Regularly monitor and review your budget and forecast to track actual performance against. Any variances should be investigated and any corrective actions should be taken.

Tips for Accurate and Realistic Budgets and Forecasts

I’ve mentioned the words ‘accurate’ and ‘realistic’ a number of times above. How do we make it accurate and realistic? Here are some takeaway tips in addition to anything mentioned above:

#1: Use of Financial and Business Software

You might be thinking of using Excel to help you create a budget and forecast as this is usually the starting point for many business ventures (it was for mine). The use of financial and business software really streamlines this process as these tools can help automate calculations, consolidate data and generate reports, which reduces the chances of human error.

#2: Involvement of Key Stakeholders

One important area of budgets and forecasts is getting input from key stakeholders in your company. These can include department heads and your finance team. Their expertise and insights can provide valuable information which enhances accuracy.

#3: Sensitivity Analysis

It’s essential to perform sensitivity analysis by assessing the impact of various scenarios in your budgets and forecasts. The key question here is ‘if you change X, what happens?’ Consider the factors discussed above. For example, if the price of your product increased by 10%, what happens to sales and profitability? This tool is usually changing one variable at a time and helps to identify potential risks and areas where adjustment may be necessary.

#4: Scenario Planning

Scenario planning is the same thing as sensitivity analysis , except you are changing multiple variables at one time to see the resulting outcome.

#5: Monitoring and Review

I’ve mentioned this a couple of times above so I will keep it brief here. Continuously monitoring your actuals vs your budget and forecast will allow you to make timely decisions and enhance the accuracy of future projections.

Your Turn

We covered a lot of ground on budgets and forecasts and it’s especially important to prepare one for your business venture, whether you are starting out or in the middle of it. We went through the types of budgets and forecasts, how to create one, some factors to consider when preparing one and tips on how to make them more accurate and realistic. Do you have a better understanding of this crucial piece of your business to ensure financial success?

If you’re not sure, make sure to contact us to see how we can help you create a budget and forecast!

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At JTL CPA, we are Ontario’s virtual accounting firm. Our goal is to automate your accounting and bookkeeping processes in a way that increases financial visibility. Pair that with our value-added approach and tailored advisory solutions gives you the ability to make sound decisions from good data. Check out our website here: https://www.jtlaccounting.com.

Thank you for making it to the end of the blog post. If there are topics that you would like to learn more about in the future, please let us know down in the comments.

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