Octopus Financial Tips
For Startups

How to forecast budget for next year?

How to forecast budget for next year?

It's almost the end of the year, and you might be thinking about making a financial plan for the next year. Or maybe someone told you to make a financial plan, but you're not sure what that means.
As the year draws to a close, preparing a robust financial plan for the upcoming year is paramount. Unsure about where to begin? A financial plan, whether elaborate or straightforward, serves the purpose of meticulously outlining your business framework. It provides a comprehensive understanding of vital metrics and goals for the year ahead.

When formulating your business budget, focus on two key elements: revenue and expenses. Revenue signifies anticipated income from sales or services, while expenses encompass operational costs. These costs are typically categorized into Cost of Goods Sold (COGS), Research & Development (R&D), Sales & Marketing (S&M), and General & Administrative (G&A).

COGS includes production costs, R&D covers innovation expenses, S&M accounts for sales and promotional costs, and G&A involves overhead costs not directly linked to product or service creation.

Cash flow is equally crucial. Regardless of your business's complexity, breaking down expenses into these fundamental categories and comparing them with this year's actual figures ensures realistic projections. Tools like Excel, Xero Budget, or customizable templates, such as those offered by Foresight, can aid this process. Their templates, accessible here, are user-friendly, adaptable for various business types like SaaS and e-commerce, and some are even free.

Given the uncertain 2024 macroeconomic landscape, crafting a prudent budget is vital. Focus on understanding how challenging situations might affect cash flow. This cautious approach prepares you for worst-case scenarios while retaining optimism for the best outcomes.

Exercise caution and conservatism in your budgeting to avoid unforeseen surprises. Regular monitoring, preferably on a monthly basis, is key. Compare actual figures against the plan and be ready to make adjustments.

In the unpredictable realm of business, unforeseen events may necessitate plan alterations. When this occurs, adaptability is key. Modifying your plan, goals, and budget mid-year is not just acceptable, but beneficial. It allows you to align your strategy with the evolving environment, ensuring your team remains informed and enabling effective adjustments.

However, while adaptability is essential, understanding your initial plan is equally vital. Regularly referring back to the original plan provides a basis for evaluating performance against initial objectives and reforecasted numbers. This continual evaluation ensures strategic alignment and positions your business for agile decision-making.

Here is a brief Check list:

Checklist: Steps to Develop an Annual Budget

  • Set Clear Objective
✔️ Define the primary goals for the upcoming year.
✔️ Align the budgeting process with the organization's strategic plans.

  • Gather Historical Data
✔️ Review the previous year's budget and actual results.
✔️ Analyze significant discrepancies and their causes.

  • Forecast Revenue
✔️ Predict sales volumes based on market trends, past sales, and marketing initiatives.
✔️ Estimate other revenue streams like interest income, grants, or royalties.

  • Identify Fixed Cost
✔️ List all recurring and non-variable expenses (e.g., rent, salaries, utility bills).

  • Estimate Variable Costs
✔️ Predict costs related to projected sales volumes (e.g., production costs, shipping).
✔️ Consider seasonal fluctuations or other factors affecting variable costs.

  • Plan for Capital Expenditures
✔️ Decide on significant investments like equipment or property.
✔️ Allocate funds for these expenditures.

  • Set Aside Contingency Funds
✔️ Decide on significant investments like equipment or property.
✔️ Allocate funds for these expenditures.

  • Review and Adjust Debt Repayment Strategies
✔️ Check current debts, loans, or credit facilities.
✔️ Decide on any early repayments or new borrowing needs.

  • Engage Stakeholder
✔️ Involve department heads and team leaders in the budgeting process.
✔️ Collect feedback and prioritize according to departmental needs.

  • Consider Non-Monetary Resources
✔️ Plan for human resources, time allocation, and other non-tangible assets.
✔️ Allocate resources based on projects, priorities, and departmental needs.

  • Compile the Draft Budget
✔️ Consolidate all data into a preliminary budget.
✔️ Review and ensure alignment with organizational goals.

  • Review and Revise
✔️ Organize budget review meetings with senior management and key stakeholders.
✔️ Make necessary adjustments based on feedback.

  • Finalize and Approve
✔️ Obtain necessary approvals (e.g., board approval).
✔️ Distribute the finalized budget to all relevant departments.

  • Monitor and Adjust Throughout the Year
✔️ Schedule regular budget review meetings.
✔️ Adjust the budget based on actual performance and changing circumstances.
✔️ Ensure adequate documentation for any adjustments made.

  • Communicate
✔️ Make sure all stakeholders are aware of their budgetary constraints and targets.
✔️ Encourage open communication for any potential challenges or adjustments needed.

By following this checklist and consistently monitoring your budget throughout the year, you can ensure a more accurate, realistic, and effective financial plan for your organization.