The Importance of Forecasting

The Importance of Forecasting

This article touches on forecasting and how it differs from budgeting.

Here are five reasons why forecasting is a good practice for all companies:

• A forecast is usually a much faster process and involves fewer employees.
• Forecasts, in general, are entered at the general ledger account level, while detailed templates, such as personnel templates, are not utilized.
• A budget is an organization’s intention for the upcoming year, while a forecast is the most up-to-date expectation of what will happen over the remaining months of the year.
• The budget is finalized before the start of the year while a forecast can be created monthly or quarterly once the year has begun and actual data can be reviewed.
• Many companies create multi-year forecasts while budgets are only for the coming year.

While the budget is created one month or two before the year starts, the bulk of it is created up to fourteen months prior to the start of the month.  For instance, the budget is finalized in November for a company based on a calendar fiscal year, which is a year prior until the next November happens.  Meanwhile, a lot can change in the various aspects of an organization regarding economy, industry, products, competitors, employees, and leadership.  A forecast can more accurately consider this, thus influencing decision-making.

A forecast should include the current year actual data for the closed months and then allow the departmental managers to adjust the amounts for the remaining months.  In addition, emulating the budget data to the forecast will enable managers to focus solely on changes in the forecast.  Also, another option is to reveal the prior year actual data as well.

Variance Analysis

The total of a variance is the difference between the actual expenses and the budget, the actual expenses and the prior-year expenses, or the actual expenses and the forecast.  To calculate revenue data, subtract the budget from actual expenses.  To calculate expenses, do the opposite.  The purpose for this is that a positive variance is typically good while a negative variance is typically bad.  Ask your staff why variances should be calculated and why they should analyze the variances.

Variance reports can have comparison reports against the budget for both month-to-date and year-to-date data.  Envision a middle section that allows for comments, and conditional formatting for quickly highlighting variances in need of review.  Variance reports can also be an exception report that allows the manager to filter out variances over or under a specific percentage so that the largest variances can be reviewed.

While there are many ways of showing variances, how management will create actionable items to prevent or correct the issues remains vital.  Variances should be a preview to a reforecast, which can immensely affect hiring decisions, marketing spending, and strategy changes.

To read more about best practices on forecasting, variance reporting and analysis processes, click here.