Get the Skinny on Budgets vs Forecasts

In Forecasting More Profit through Valuable Discussions, we discussed how a budgeting and forecasting cadence could benefit very small companies, but we primarily focused on forecasting. It is easy for most business owners to understand how regular cash flow forecasting can be valuable; however, the same is only sometimes true when it comes to the budgeting process. 

How is a budget different from a forecast?

A budget is a comprehensive set of goals for what the business "hopes" to achieve. It should be aspirational yet achievable. It is developed before the beginning of an accounting cycle and is generally kept the same after it has been completed and approved. A forecast, on the other hand, is a projection of the financial outcomes of a company that changes each time it is reviewed.  But because a budget is created once an accounting year, many companies think the budgeting process dies when the budget is complete, but that’s just the beginning!

Consistently reviewing Budget vs. Actual comparison reports allows clients to revisit their past assumptions and understand their mistakes.  The comparison will help them identify trends in their business so they can react to improve their business performance. You may need to pick your battles with someone who maintains the "So, I’m going to set targets to hold myself accountable?" attitude and refocus the conversation on the forecasting process, which feels less rigid because it is a moving and adjustable target that changes based on actual results. 

The value of a budgeting

As an accounting or bookkeeping professional, you have the opportunity to help your clients understand the value of budgeting. You can make the case that a budget can serve as a guardrail for the owner to navigate to an intended outcome. It can keep them focused on maximizing revenue and minimizing expense in the most critical accounts in their ledger based on the priorities you identify together. If a client is not receptive to the rigid nature of a budget, you can shift the conversation to focus on forecasting instead.

While the value of a budgeting process may not initially resonate for the business owner who is still making every decision, once they begin delegating important decisions, they crave the accountability that a budgeting process creates. Companies with only a handful of decision-makers rarely have appropriate internal processes and controls. You can step in to fill this void and provide real value to your client. 

Create a corporate performance culture

There isn't a corporate performance culture in many small businesses, primarily due to scarcity in the candidate pool and lack of infrastructure. The business owner might find it difficult to demand accountability out of concern that they will lose key people or that word will spread that they are an intrusive micromanager. The first step to developing a healthy corporate performance culture is confidently delegating a budgeting process with monthly performance reviews. You can assist by assuming the "bad cop" role if your client initially feels uneasy about being in charge of this.

When employees have targets and are regularly held accountable their behavior changes. They pay closer attention regardless of whether they are motivated to fulfill their goals to receive a bonus or are afraid of embarrassing themselves at the upcoming budget review meeting. Action triggers are discovered and made over time. It fosters team cohesion and alignment with corporate objectives.

Create a better budgeting process

Consistency builds habits, trust, and stability. When you get together regularly to discuss successes and failures, everyone learns more—this continuous transfer of knowledge results in better processes, ideas, and decisions. The more people are involved in making decisions, the more this is true.  

Letting go of control is hard. Small business owners are all too familiar with the adage, "if you want something done right, do it yourself." And while there's some truth to that sentiment, it can also significantly hinder a company's growth. Delegating tasks is crucial for any business owner, but it can be challenging to let go of control when you're used to doing everything yourself. A budgeting cadence can help give them the confidence that their employees are on the right track; if they're not, they'll be able to identify and address the issues quickly.

Remember, a budget differs from a forecast because a budget is a spending plan, while a forecast is an estimate of future income and expenses. Budgeting is essential because it helps create a corporate performance culture and provides a roadmap for business success. As an accounting professional, you have the skill, knowledge, and tools to empower your clients.