Budgeting and forecasting are both important tools for running a business, but they serve different purposes. Think of a budget as a detailed plan that tells you how much money you can spend, while a forecast is an estimate of what might happen in the future. Both are crucial for managing your business effectively and preparing for what’s ahead.
What is Budgeting?
Budgeting is like creating a roadmap for your business’s money. It helps you decide where to spend your money to achieve your goals. For example, you might set aside money for marketing, paying employees, or buying new equipment. A budget guides your daily decisions and keeps your business on track.
Types of Budgets
There are two main types of budgets:
1.Operational Budget: This is used for everyday expenses like salaries, utilities, and supplies.
2.Capital Budget: This is used for big purchases or investments, like buying new machinery or launching a major advertising campaign.
Budgeting Techniques
Different methods can be used to create a budget:
- Zero-based budgeting: You start from scratch and justify every expense.
- Percentage of sales budgeting: You allocate a percentage of your revenue to different areas.
- Value proposition budgeting: You spend money where it brings the most value to your business.
- Surplus budgeting: You plan to have more income than expenses.
- Gap budgeting: You identify and address gaps between your goals and actual performance.
How to prepare a budget
Preparing a budget can be a huge task depedning on the size and operations of a company. This article only mentions the major considerations when it comes to budgeting. Thus, to create a budget, start by calculating your total income. Then, list your fixed costs (like rent) and variable costs (like utilities). Consider any planned investments or changes in your business strategy. Subtract your expenses from your income to see how much profit you can reinvest in your business.
Some companies hire a financial officers who can help in budgeting and others opt to work with financial and accounting firms to help them create budgets. Regardless of the approach used, budgeting for a business needs to be utmost realistic to avoid surprises that could end up leading a company into deficit or other unfortunate circumstances.
What is Forecasting?
Forecasting is about looking ahead and predicting what might happen in the future. Businesses often use forecasting to estimate whether they will meet their financial goals. For example, you might forecast how much revenue you expect to earn or how much you’ll need to spend.
Types of Forecasting
There are two main types of forecasting:
- Qualitative Forecasting: Based on expert opinions or market research.
- Quantitative Forecasting: Based on hard data, like past sales numbers or economic trends.
How to prepare a forecast
Similarly, financial forecasting can be a huge task and this article only highlights some major considerations. Thus, to create a forecast, list all the assumptions you’re making, like expected sales growth or changes in the market, suppliers influence, and more. Consider factors like pricing, competition, and customer behavior. This helps you predict what your business might look like in the future.
Why both budgeting and forecasting are important in Rwandan businesses
In Rwanda, like in any other place, businesses need both budgeting and forecasting to thrive. Budgeting helps you manage your day-to-day expenses and ensures that your business stays on course. Without a budget, you might overspend in one area and not have enough money for other important things.
On the other hand, forecasting allows you to prepare for the future. By predicting possible outcomes, you can make better decisions today. For example, if your forecast shows that sales might drop next year, you can start planning now to minimize the impact. Together, budgeting and forecasting help you run your business smoothly, avoid surprises, and grow over time.
In our next articles, we will take you through the indepth processes of budgeting and forecasting.