In this blog I’m going to tell you what a budget is and what a forecast is, and why they are both massively important to the success of your franchise business.
Knowing what you are aiming for is vital in business.
You need a vision (that wonderful future) but also a practical plan to get to it.
If you don’t know where you are going:
- It doesn’t matter where you end up
- You might go round in circles
- You might end up where you started
Deciding where you want to get to is the starting point. That’s a different subject, but for now, let’s assume you have a vision/direction/destination/endgame – call it what you like.
How do you monitor whether the business is going in the right direction?
Two of the most important tools to use are budgets and forecasts.
You’ll hear “budget” and “forecast” a lot in a business growth context but most business owners (and quite a few accountants) don’t know what the difference is or why it matters.
A budget sets out, in numbers, what the business expects to achieve in a given future period of time.
By achieve, I mean in terms of profit, financial position and cash flows.
With a budget, we are saying “Given where we are trying to get to, in the coming year we expect sales to be £X, profit to be £Y and cash in the bank at the end to be £Z”
The budget will be updated once or twice a year, and we would look at actual numbers versus budgeted numbers to see where it’s going right or wrong.
By looking at these differences (aka variances), we can identify whether we need to take any sort of action to bring the actual numbers back to where we think they should be.
A forecast sets out what we think will actually be achieved.
With a forecast, we are saying “Given where we actually are today, and what we think will actually happen, this is what we think the numbers will actually look like in the future.”
The forecast is updated regularly (continuously, if you are using sensible software) to ensure it reflects the actual situation.
We don’t compare the forecast to actual results, because the forecast is based on continuously updated actuals in any case.
A good analogy is that a budget is like the old paper roadmap; it gives us an overview of the route we’d like to follow.
The forecast is the satnav; it responds in real time to road conditions ahead to change the route.
Both budgets and forecasts are massively useful in controlling a business, but if I had to choose between them, I’d choose a forecast.
A budget may end up as an unrealistic wish list; a forecast is based on reality. And reality is always better.
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Chris Martin is a chartered accountant and business advisor and has been helping franchisees create and grow wonderful businesses for over 20 years. He is a published author and has written extensively on franchisee tax issues. He passionately believes that whilst franchising is a deservedly successful business format, franchisees are often let down by their franchisors’ failure to offer support and guidance regarding the financial side of running the business. This leaves franchisees frustrated, overwhelmed and unable to grow their businesses to the extent they should. Chris has developed simple systems, support and guidance to ensure franchisees create businesses that provide them and their families the lives they so richly deserve.