How To Budget And Forecast

Business Plans, Budgets & Forecasts: A How To Guide For Your Organization

Is your head spinning from all the stress & time spent on business plans, forecasts and budgets?  Remember, planning is not a science…it’s an exercise…that should refresh you, keep you agile, and make you feel in control of your destiny!  Is that how you feel?  As we enter into this year’s budget and forecast season, try to challenge yourself and your team to become more efficient and to create better standards for planning and budgeting.  In turn, you will be less likely to reinvent the wheel each year.  This article is a practical overview of each process (Business Planning, Forecasting & Budgeting), how to connect them, and have them add value to your business.

So why is planning so stressful?  Take a look what a planning calendar can look like: February-April prepare business plan, July-September prepare forecast, October-November prepare Budget, Feb start over again.  The larger the company, the more planning that takes place.  People get nervous about the process, don’t know where to start, fear they will be judged, and think a lot of time is wasted.  In small companies planning often gets overlooked because of time constraints or lack of interest.  If you understand the differences between each planning tool, the impact they have on one another, and on your business, you will be more inclined to use the information properly.  Here is an overview of how to control the planning exercise and get the most out of it.

What is a Business Plan?

A business plan is a written description of your strategy going forward.  It outlines the direction of your overall business and each function of the business supporting that overall direction.  It details market share changes & assumptions that are charted out over the time period such as economic assumptions, competitors, pricing, costing assumptions, new product releases, retired product plans, new facilities, reductions in some areas and investment plans in others.

When creating a business plan you need to understand where your company is today, and where your want it to be during a time period, in one year, two years, three years.  Also, what happens to the market around you when you make your changes, how will the market/competitors react, what are the anticipated risks?

The benefit of a business plan is to get everyone on the same page as to where the company is going.  It shapes all the decisions going forward; a litmus test for decision making and planning.  It is also a good reference point for assumptions.  If assumptions change, so should the business plan.

The problem with business plans is when they remain static documents; they shouldn’t be.  They should be updated throughout the year, just like a budget-to-actual analysis.  Things change and evolve, so should your litmus test but always maintain a record and comparison versus the original to maintain as a “baseline” so that you can evaluate your assumptions and take away lessons learned for the next business cycle.

Your business plan should be communicated throughout your organization.  You do not need to share all of the details, especially if there are workforce reductions or other sensitive assumptions.  However, you should take a broad view of the business plan and share it.

Share the vision: where are you today, where do you plan to be

Share the mission: macro scope actions the company must to take to get there

Share the expectations: quarterly or other time frames to accomplish the mission

What is a Forecast?

A forecast is financial trend that mirrors the business plan period.  If you develop a five-year business plan, you should create a five-year forecast.  Forecasts should be rolling.  That means each month they should be updated (actual data replacing estimates).  Forecasts should be fluid, linked to changes in the business plan. Forecasts should be updated each year, not reinvented.  Current year forecast should represent a macro level budget.  Forecasts should be macro product line level, not SKU/Customer level..  The basic components of a forecast are sales, costs and investments….in that order.  Don’t forget to estimate personnel required to deliver the volumes in the plan as part of your costs.

Sales Forecast

In a spreadsheet list each product line.  Add last year’s actuals by month for volume, price and revenue.  Project current year results by month using actuals that exist and projections for each month going forward. Do the same for the next two to four years.  Each year determine and incorporate the following assumptions:

  • Value of the dollar over each year.  It is fine to assume no change for the sake of planning, but state that is the case.
  • New product lines coming on line
  • Old product lines going away
  • Pricing strategy
  • Key account strategy…accounts you are targeting for growth and those you may walk away from.
  • You should try to transition low margin business for new higher margin accounts.
  • You should have a baseline conservative projection in line with your business plan strategy, and then a second line that accounts for risk and opportunity.  This is important to determine what investments you NEED, and which ones may be necessary.  It is easier to get funding for non-budgeted investments if they are based on exceptional growth.
  • There is no science here…if you can explain blips and dips in the previous year, you can project or eliminate them in future years.
  • Your forecast should not look like a hockey stick…conservative first year then dramatic growth the following years.  By having a realistic story and a separate story for risk and opportunity, you can create a real document that your company can use.
Costs & Investments

Once the sales forecast is complete, the operations group evaluates the sales volumes, determines any investments that need to be made to meet volumes or new products.  They determine directional estimates on raw materials, and workforce requirements.  Once complete the accounting team takes this information and builds the forecast model, determining projected profits and losses.  Consider the following assumptions:

  • Are facility expansions or capital equipment expenditures required?
  • What inventory levels will be necessary for the plan, are they different than previous years?  Is more space required, less space?
  • Anticipate cost reductions due to production & logistics efficiencies; incorporate efficiency programs into the plan.
  • Be realistic in your assumptions, not too conservative on costs.  Your objective is to reduce overall costs and efficiencies.  If they remain the same over time you should be prepared to explain the assumptions that raw materials are going up but your programs are maintaining cost levels…what are those programs and what time periods will they be impacting the plan.
  • Be sure to incorporate any marketing plans into your cost structure.  Will there be new packaging, new services, etc.…

What is a Budget?

A budget is a micro level analysis of the upcoming year.  You typically finalize the budget by November if you are planning a calendar year budget (Jan-Dec).  In comparison to the product line level forecast, a budget breaks the numbers down to the customer and product SKU level.  Your budget should mirror year one of your forecast.  If something changes during this process and the totals differ…take the time and update your forecast while the information and rational is fresh in your mind.  Otherwise you run the risk of starting over again next year.  Everything should be linked, and changes should be made consistently.  Here are some things to consider for your budget process:

  • Consider your time frame for: personnel additions, new customer coming on line, and cost changes.
  • Do you plan any price increases or cuts planned?
  • Do you have purchasing contracts in place?  Try to settle these prior to finalizing your budget.  The more accurate the data, the better.
  • Can you negotiate sales contracts with key accounts prior to the budget process in order to reduce price and volume risk?
  • All departments of the organization incorporate their spending assumptions in the budget process.  Use current year actuals as a base, then justify increases or decreases each month, taking into account any explanation for dips and peaks that occurred in the current year.
  • Make sure your budget is also a rolling document.  Every month, as you start, and throughout the year, it should be updated with actual results (on a separate line).  Do not forget your budget assumptions…learn from them and compare your actual to budget figures.  What changed, and do these changes impact future months?

Whether your are leading an organization a department or your individual contribution to the planning, forecasting or budgeting process…you should have an understanding of the big picture and how things relate to one another.

Here are some final do’s and don’ts of planning exercises:

Do use old information to plan for the future.

Don’t forget to account for dips and peaks in the past…make a decision to incorporate them or not into future planning.

Do tell as story with your data.  You should add comments to your spreadsheets.

Don’t forget why you put figures into your planning, or where they came from.

Do account for rainy day funds, miscellaneous costs & margin of error.

Don’t hide this information in your figures, put it a separate line that is visible.   If everyone hides extras/padding the entire budget will be skewed and this could make for bad business decisions.

Do be honest, direct & candid throughout all aspects of planning exercises.  If you are leading the exercise, create an environment where people can be honest with you.

Don’t create a useless document that brings no value to the business besides looking good during a presentation….followed by endless explanations for failure throughout the year.

Do create and include a tactical plan into your figures that is linked with the business plan mission.  What are you doing to achieve the mission on time?  What are the costs associated and the cost reductions/new business results that are generated from your efforts?

Don’t separate the business plan from the forecast or the budget.  Always revisit, revise and learn.

Do communicate, communicate, communicate, the plans and the results, as well as the story of what the company is learning from the process.

Don’t create documents that get put away until they are reinvented the next year.

It really does help to take a full picture view of planning, have a well rounded understand your business and the needs of each functional area.  Understand how things connect, and how together, they can make the company stronger and more agile.  If your business is a service provider, or a project management entity, these principles still apply.  The difference is that instead of calculating volumes & pricing, you calculate timing and cash flows.

Tell us about your planning experiences.  Does your company do a good job?  Do you feel like a part of the process, or just a micro contributor?  Consider using this training article in your organization to get everyone on the same page, working together with the same direction and purpose.


Written by Lisa Woods, President Lisa Woods Consulting & Founder of

Lisa is a dynamic business leader & author located in Western New York with more than 20 years experience leading, managing and driving growth in the corporate world. Today she partners with business leaders to understand their vision, identify internal and external roadblocks, define a practical strategic path forward and guide a successful transformation. This work includes strategy definition & goal setting, organizational design, facilitating team buy-in, establishing visual metrics, internal and external research studies, business feasibility assessments, and investor insight into organizational strength, weakness & strategic opportunity. She helps business leaders drive growth & increase profits.

Strategic Consulting ǀ Management Consulting: Strategy Realized

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