Budgeting and forecasting are your financial GPS. When you drive your car, you need to know where you’re going; you wouldn’t set out across unfamiliar terrain without at least some guidance. The same is true for your business.
A solid budget or forecast not only tells you where you’re headed but also helps you map out the best path to get there. It can clarify when to hire or restructure, when to invest in technology, and when to strengthen your banking relationships. In short, a good forecast becomes your guide for smart, confident decision-making.
Every budget or forecast begins with a clear understanding of expected revenue. Best practice is to evaluate your key customer relationships, their financial health, and when they’re likely to place (or pause) upcoming orders.
Track your progress frequently, I recommend at least weekly, and be ready to adjust your targets when you overperform or underperform against goals.
Once you have a revenue outlook, use it to shape your cost of goods sold (COGS) and fixed expenses. Be conservative. It’s safer to assume your COGS will run slightly higher than historical averages so you’re pleasantly surprised rather than stretched thin. This discipline also helps you keep fixed expenses in check, since you’ll be planning with a slightly smaller gross profit cushion.
What Are the Key Elements of Budgeting and Forecasting?
Personnel costs often make up the largest share of fixed expenses. Avoid overinvesting here. It’s difficult and demoralizing to reverse course if reductions become necessary. Leaders will always be passionate about hiring to meet growth, but they’ll be even more passionate if forced to make cuts later. The key is to stay just a step behind your growth curve when it comes to staffing and overhead.
Don’t overlook non-operating income or expenses that could affect your cash position. Many businesses can forecast revenue and expenses reasonably well, but the real shortfall often lies in forecasting cash. That is where the true power of a forecast lies.
We’ve all heard “cash is king,” yet too many businesses still focus solely on profit-and-loss projections. Your cash forecast should also reflect working capital needs – accounts payable, accounts receivable, and inventory – as well as debt repayments and distributions.
A complete forecast connects the entire balance sheet and cash flow statement. This ensures operating cash needs are funded by operating sources. For instance, if you’re using a line of credit, it should support your working capital (A/R, A/P, inventory), not your fixed costs. Using debt to cover payroll or overhead only delays deeper issues.
Creating a forecast isn’t as complicated as it sounds. The key is to understand your business and focus on the factors that matter most. Avoid copying assumptions from others; if you have no inventory, don’t waste time modeling it. If your customers pay slowly, invest effort in tracking payment cycles.
I recommend monitoring your days sales outstanding, days payables outstanding and days of sales in inventory to understand how cash moves through your business.
If you know your historical sales and cost patterns, you can build realistic projections for the months ahead. Fast-growing businesses in particular, are often surprised by how much cash gets tied up in working capital. To bring it all together, use the indirect method of forecasting: project your balance sheet and income statement at a high level, then “solve” for cash.
This gives you a complete, flexible view of your financials that can be quickly updated as new information comes in.
Finally, remember that a forecast only works if you use it. If a project runs over budget, your forecast will prompt early conversations with your bank. If a slow season looms, it will give you time to adjust spending. The advance warning, both for opportunities and challenges, can make all the difference.
In the end, budgeting and forecasting aren’t about spreadsheets, they’re about clarity, control, and confidence. When you take the time to plan with intention, you’re not just predicting the future of your business, you’re actively shaping it.
Allen Riggs is the chief financial officer at PSA Network.
