As businesses gear up for the year ahead, tasks of budgeting and forecasting for the upcoming year take center stage. In today's evolving and sometimes uncertain economic landscape, managers find themselves grappling with the need to create accurate and flexible financial roadmaps. To achieve this successfully, they must understand the various internal and external factors that can impact a company's financial health.
Here, 16 Forbes Finance Council members share crucial points that managers must consider to ensure their budgeting and forecasting projections are accurate, adaptable and capable of steering their organizations toward sustainable growth.
1. Historical Performance
A crucial factor that managers need to consider when budgeting and forecasting for the upcoming year is the company's historical financial performance. Analyzing past financial data provides valuable insights into revenue patterns, cost trends and overall profitability. Managers can identify seasonality, cyclical fluctuations and specific trends that may impact future financial performance. - Paula Thielen, Thielen & Associates, Inc.
2. Multidisciplinary Insights
A key factor when budgeting and forecasting are to develop a game plan for engaging multiple disciplines within the company to leverage their specific knowledge. Far too many organizations focus on budgeting and forecasting as an accounting function. Those folks are vital, but the operational experts need to engage, as well, to craft a truly strong product. - Katherine Jackson, Growth Capital Partners (GCP)
3. Marketing ROI
When budgeting and forecasting for the upcoming year, managers should first consider what brought in the lowest vs. highest ROI in terms of marketing efforts. This can make for some easy first cuts and increase ROI out of the gate moving into the coming year. - Ryan Carroll, Wealth Assistants
4. The Economy And Its Effect On Donations
For nonprofits, more than anything else, the economy and its effect on donors will be one of the top factors when considering budgets in the upcoming year. Although individual donors are traditionally resilient in tight markets, donations could trend lower or come in later than expected. Cash flow will be tight. For this reason, expenses, expectations and programming should be amended. - Damaris Herron-Watkins, A Better Chance Inc.
5. Unforeseen Circ*mstances
Managers need to consider the potential impact of unforeseen events and risks. This includes factors like natural disasters, political instability, supply chain disruptions, cybersecurity threats and global pandemics. By conducting scenario analysis and stress testing, managers can identify and prepare for potential risks, ensuring that the budget and forecast are resilient and adaptable to changing circ*mstances. - Jose Rodriguez, Got Credit?
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6. Contingency Plans
Have a few scenarios built out to address if things don’t go as planned. In other words, if you don’t hit your revenue targets, how do you plan on containing costs? What projects will you delay or cancel? Will you let people go? Make sure you have a plan to contain costs in the least disruptive way so you aren’t taken by surprise if things don’t go according to plan. - Aaron Spool, Eventus Advisory Group, LLC
7. Impacts Of External Factors
One factor that managers need to consider when budgeting and forecasting for the upcoming year is the potential impact of external factors and market conditions. Economic conditions, industry trends, customer behavior and supplier relationships help managers develop more realistic budgets and forecasts for potential prospects and challenges. - Cynthia Dalagelis, Amalgamated Bank
8. Alignment Of Goals
It is important to consider the alignment of the enterprise's strategic goals to ensure these are translated to budget and forecasts appropriately. It is expected that the strategic goals would have considered the macro and micro economic factors. - Oluwatoyin Aralepo, Mastercard Foundation
9. Past Financial And Operational Data
Historical data can greatly indicate how your company performs throughout the year. Managers should review past financial and operational data to identify trends and patterns that can help inform the budgeting and forecasting process. Analyzing historical data provides insights into revenue patterns, and can help predetermine when in the year your business may need additional financing. - Xan Myburgh, Backd Business Funding
10. Regulatory Changes And Technological Advancements
One crucial factor to consider is external factors such as market trends, economic conditions, regulatory changes and technological advancements. These external factors can significantly influence the organization's financial performance, so managers must analyze and incorporate them into their budgeting and forecasting processes to make accurate and informed decisions. - Bilal Surahyo, Simpli Home
11. Multiple Budget Iterations
A budget, at the end of the day, is really a game plan. But games often don’t go according to plan. What will you do if things change? How will you handle that? I recommend that you have an A, B and C budget. This gives you options so you can pivot, if necessary. If all goes well, you can stick to the A plan. But if things change, you’re already ahead of the game with alternative plans. - Todd Sixt, Strait & Sound Wealth Management LLC
12. High Inflation And High Interest
The uncertainty around the macroeconomic outlook is an essential one to consider. Companies have not seen a combination of high inflation and high-interest rates in years, and these factors can have a very significant effect on all lines of budgeting and forecasting. - Daniele Viappiani, GC1 Ventures
13. Economic Indicators
Budgeting and forecasting are the economic environment. Managers need to monitor economic indicators and make assumptions about things like inflation, interest rates and GDP growth. These assumptions can have a big impact on the accuracy of the budget and forecast, so it's important to be as realistic as possible. - JD Morris, RHC 21 LLC (a SPE Fund) with family of Special Purpose Entities (SPE or SPV)
14. Baseline Costs And Investments
While there are many factors to consider, at the highest level, each business unit needs to consider the granular baseline costs that must continue to support the ongoing functions of the business, as well as the investments required to defend and grow the business. It is important to have all costs itemized at the granular level so that all monthly reviews can validate their merit. - Nick McGuire, DataLink Software
15. Non-Financial Factors
They need to identify the non-financial drivers that they can control when developing the forecast—looking at the end in mind and working backward. Doing so gives managers an easy way to determine if a goal is obtainable or not. Don’t just create a number for number’s sake but have a plan to attack that goal. - Jody Grunden, Summit CPA Group
16. Investment Led By Revenue
Start with this year's budget on next year's revenue forecast. In other words, let revenue lead investment. Particularly in high-growth companies, it is common to increase the budget to generate higher revenue forecasts, but the safest starting point is to hold the budget flat and use growing revenue to fund new initiatives and strategies. This flexibility is especially helpful in an uncertain economy. - Zack Cook, Keyfactor
