A budget sets out what a business aims to achieve financially. A forecast estimates what is likely to happen as circumstances develop. Used together, they can help business owners make informed decisions, identify potential problems early and plan for the future.
1. What is a budget?
A budget is a financial plan for a defined period, often a year, setting out expected income, expenditure and profit. It provides a benchmark against which actual performance can be measured.
Revenue: Estimate expected sales using previous results, current orders and realistic assumptions.
Costs: Include regular costs such as rent and salaries, alongside variable costs such as materials and utilities.
Profit: Compare expected income and expenses to assess whether the planned activity is financially sustainable.
2. How to prepare a useful budget
Start with reliable information. Review previous accounts or bookkeeping records, consider changes in prices and demand, and separate costs that are fixed from those that rise with sales.
Set achievable targets. Decide what the business wants to accomplish, such as improving margins, controlling overheads or investing in equipment.
Review performance. Compare actual results with the budget each month or quarter. Investigate significant differences rather than simply replacing the original targets.
For further guidance on interpreting business accounts, read our Understanding Financial Statements guide.
3. What is a forecast?
A forecast is an updated estimate of future performance based on the latest information. Unlike a budget, which records the original plan, a forecast can change when sales, costs or market conditions change.
Use historical results. Look for seasonal patterns, recurring expenses and trends in sales.
Record assumptions. Consider expected orders, staffing changes, price increases and other factors affecting performance.
Update regularly. Revise the forecast when new information becomes available so that decisions are based on realistic expectations.
4. Budgeting and forecasting in practice
Suppose a business budgets for £120,000 of annual sales and £95,000 of costs, giving a planned profit of £25,000. After several months, orders are lower than expected and the business forecasts sales of £110,000 with costs of £93,000. Its revised forecast profit is £17,000.
The difference does not automatically mean the original budget was wrong. It gives the owner an opportunity to examine the reasons, reconsider spending and adjust plans before the year ends.
Remember that profit and cash are different. A profitable business can still experience cash shortages if customers pay late or major bills fall due. A separate cash-flow forecast is therefore important, including expected tax payments.
For practical ways to manage these risks, see our Cash Flow Management guide.
5. Making the figures useful
Keep the process proportionate. A simple spreadsheet or suitable accounting software may be sufficient for a small business, provided the figures are accurate and reviewed consistently.
Be realistic. Avoid relying on optimistic sales assumptions or overlooking irregular expenses.
Compare and explain. Review actual performance against budget and use the forecast to assess the likely year-end position.
Plan for decisions. Use the information when considering hiring, investment, pricing or reductions in expenditure.
Seek support where appropriate. An accountant can help interpret results, test assumptions and identify areas requiring attention.
How Johnson Accountants can help
Johnson Accountants can assist small businesses with interpreting financial information, reviewing performance against expectations and considering the accounting and tax implications of business plans. Contact us to discuss the support appropriate to your circumstances.
Find out more about our accountancy and tax services or book a meeting with Johnson Accountants to discuss your requirements.
This article provides general information and is not a substitute for advice based on your individual circumstances.
