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Budgeting and forecasting process is an event that most companies go through every year. The ultimate aim of performing budgeting and forecasting process is to established a financial target which set the company’s future direction.

Most companies prepare a master budget every year. The master budget is used to compare against the company’s interim performance which could be in monthly or a few months interval. Some companies prepare interim budgets or forecasts in between the years. The forecast is a combination of actual results of the passed months together with the budgeted figures of the future months to give a projected results for the year end.

The budgeting and forecasting process varies from company to company. The technique, template and time taken also varies from company to company. Majority of the process is done by the Finance department. The rest are done by the respectively non-Finance departments respectively.

The following are examples of a budgeting and forecasting processes that was practised in one of the companies that I have worked before.

Budgeting Process

The following budgeting process involves the participation of all the senior staff in the whole organization.

1.  The senior management held a meeting to discuss and set the future directions of the company.

2.  The key financial information such as future business targets are identified.

3.   Taking cue from the business plans, a deadline for the completion of the budgets is determined.

4.  The Finance head will start the preparation process by accumulating the historical financial data and put them in the templates similar to the existing financial statements.

5.  The budget templates are then further extended to departmental or cost centres levels.

6.  The business targets and the templates are distributed to the various departmental heads which consist of both Finance and non Finance managers. All the managers are required to prepare their budgets for their respective areas and devise business plan on how to achieve them.

7.  The Finance manager will collect all the completed templates from the respective departmental managers and compile into a master budget.

8.  Once the master budget is ready, the Finance manager will present it to the senior management.

The above processes can be summarized into 4 main steps as follows:

Forecasting Process

The forecasting process is slightly different from the budgeting process. While the budget sets the targets for the company to achieve, the forecast provides the company with an idea of what is expected.  A budget starts as the same time of a new financial year. However, a forecast is prepared a few months after the financial year. The forecasting process start with:

1.  Accumulation of actual results for the past few months after the new financial year.

2.  Using the actual results as a basis, revise the business plans or strategies for any changes needed and make a forecast on the results for the remaining months of the financial year.

3.   Combine the actual results together with the forecast for the remaining months to give a forecasted result for the full financially year.

To identify the extend of the forecast easily, you can name the final forecast report using the actual number of months with the forecasted number of months. For example, if the number of actual months is 4 months (January to April) and the forecasted months is 8 (May to December), you can name the forecast report as 4 + 8 Forecast. 4 + 8 Forecast literally means four month actual results plus eight month forecasted results.

The above processes can be summarized into 4 main steps as follows:

The above budgeting and forecasting techniques and approach are purely based on real live case and may differs from those that are taught in schools or colleges. The techniques and approach may varies from company to company.

The budgeting and forecasting process is a long and tedious process. In this live case, it took roughly three months to complete. The most important point of the whole process is not only to get the master budget out as soon as possible. It is equally important to ensure that the master budget is error free as many major decisions are made based on it.

Today there are many budgeting and forecasting software available in the market. The decision of whether it is necessary to invest in one of these software varies from company to company. Without the software, the master budget can still be completed using spreadsheet such as Microsoft Excel or Lotus 123. Of with the help of the software, the budgeting and forecasting process can be made simpler and more systematic thus saving time and enhancing accuracy.