In business, knowledge is power. The keys to a successful enterprise rest on the ability to stay agile, to make the best decisions in a timely manner.
Being able to forecast overall income and expense, net profit or loss, overhead costs or the performance of individual functions is a crucial of strategic management. But the ability to forecast is determined by how your budget is set up. You can forecast for an entire year or use real-time data to project results. By creating different budgets, or different reports within a master budget, you can effectively forecast the performance of your business.
1. Create A Master Budget. By far the easiest technique, a master budget is an ideal way to forecast the performance of a business. Based on recent performance, this static document projects a snapshot of how you envision your business will perform over the course of the coming fiscal year.
Performance is projected based upon income and expense data from one or more previous years as well as trends and market knowledge. This forecast is then taken to managers who discuss the anticipated performance of products or services, changes in the marketplace and other factors that might cause changes in your company’s results compared with the previous year. Forecast your final budget using your recent performance numbers and agreed-upon projections.
2. Make real-time projections. You can create an additional column of information in your master budget that projects your annual performance using data as it occurs. This technique can improve the accuracy of your forecasts. For example, by using your first three months’ sales figures, you might be able to project more accurately your year-end totals – more so than a static master budget does.
As you enter data into your master budget, divide the "Total" column results by the number of months that have passed to get your average monthly income and expenses. Multiply the numbers in this column by 12 to project where you will end the year if these numbers continue at their current levels.
3. Make Overhead Projections. Knowing precise per-unit production costs is critical to forecasting profit. Overhead costs are factored in as the costs of selling these units.
If you have $1 million worth of direct expenses to make a product, and it costs $2 million to run your company, your actual cost to sell each unit will be $3 each. Keeping track of overhead will help you project your margins and profits if you adjust your production numbers.
Use your master budget to identify all overhead costs, such as rent, insurance, utilities, phones, office staff and marketing to determine the company’s overhead costs. Divide this total by the number of units you produce to determine your overhead costs per unit.
4. Create multiple scenarios. You can use your master budget to create scenarios to project how different levels of sales and different prices will affect your bottom line.
Create three scenarios: In addition to the initial annual projections you and your team make based on your recent history and anticipated market conditions, create two more budgets that show a lower amount of sales and a higher amount of sales. This will let you project the impact on your business to see where you can make adjustments. Create two more budgets that forecast your performance at price points higher and lower than your current prices. Adjust your sales numbers to reflect the impact your two prices changes will likely have. This will help you project sales, profits and margin changes. If your sales rise in response to lower prices, your profit per unit will increase as your overhead cost per unit goes down.
Software and applications can greatly improve the speed and efficiency of budget forecasting. TGO Consulting offers solutions tailored to meet your unique business needs. Contact us today and learn how you can optimize your business.