Accounting: Making Sure 2 + 2 = 4

As a New Business Owner, Do You Know the Difference Between Forecasting and Budgeting?

1 December 2021

Dwayne Barnes

If you are planning to open a business soon, you will have to do quite a lot of number-crunching, and while this may not be your forte, you have to be realistic with your projections. You need to be as accurate as possible so that you can keep going when you finally open the doors. Crucially, you need to understand the difference between forecasting and budgeting, and while they may sound like they are the same thing, they aren't. What do you need to know as you figure out your path?

Projecting

At this stage, you may be confident that you have a product or service that will sell. You may have figured out why there will be a demand (also known as a unique selling proposition) and have focused on your ideal customer base.

Now, you'll need to develop a realistic sales target for the first year and calculate how you're going to get there. You'll take into account potential sales and your expenditures, and this is where the budget comes into play.

Budgeting

This is not a time to be overly optimistic, nor is it the time to be seriously pessimistic. Instead, you need to strike the right balance and be realistic about your sales targets. You will also need to have a shrewd idea of how much money you will need to produce your product or service and how many staff you will need. Take into account all of the additional costs of employing staff and then calculate your overheads as well. Put the direct costs associated with actually producing the product or service in one category and the overhead costs (rent, utilities, etc.) in another. Revisit your budget often and ideally each quarter so that you can make small adjustments if necessary to keep moving forward.

Forecasting

You will also need a cash flow forecast, and this is where many new business owners struggle. Here, you predict how revenues actually flow in to the bank and how expenditures flow out. You must be on the lookout for any pinch points when you may not have enough money in the bank to pay due bills.

Padding to Survive

It can be difficult for a new business to survive the ups and downs associated with cash flow. Your job is to ensure that you have enough padding in your bank account so that you can continue trading, make progress and avoid any default.

Getting Help

As you may have no experience here, bring in a business accountant right away. They will help you to draw up your forecasts, your budget and any other financial tools you may need.

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