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Neil Patel

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Why is it important to update your budget and forecasts? Updating budgets and financial forecasts is critical to survive and thrive as a business.

Perhaps even more so in a startup, where things change so fast and frequently. Even small changes can have a big impact. Think of this as your armor and equipment for minimizing risk and optimizing success.

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    The Importance of Budgeting

    Forecasting and budgeting are vital for all organizations. The work of the budget or financial forecast is to prepare the business so that the company remains sustainable and growing at all times.

    Budgeting and forecasting prepare a business for the period ahead. You can use the instruments to determine when to cut or increase overhead costs. That’s how you improve organizational efficiency or optimize profits.

    Put some efforts in place during the budgeting phase to help increase customers and capitalize on a new product offering. You’ll also develop a new marketing strategy to keep your business ahead.

    A financial forecast and budget can help a business identify and mitigate risks in advance to avoid financial downturns. Creating these financials lets an organization see profit and loss, vital for business valuation and survival.

    Whenever a business is not effectively budgeting, it becomes harder to secure funding. You’ll find it harder to meet its business obligations or any expansion strategy.

    After seeing the numbers, a business may trim out any frivolous spending. Or set up austerity measures to keep the business afloat during the .

    A good budget or forecast can enable a business to plan and predict cash flows. When you can predict cash flows, it is possible to determine how much money is necessary to meet operations. And find means of offsetting shortages.

    The tools can also help plan for big business expenses such as tax bills and utilities that leave many businesses in need of cash.

    Having a solid knowledge of cash flow can enable the business to set up a plan and take control of its finances. The organization is, therefore, able to save money for its expenses such as paying staff, bills, and purchasing inventory.

    Learn How to Employ Forecasting and Budgeting Tools

    It is through budgeting that an organization can ensure they do not go in the red.

    Forecasting and budgeting can be great tools to analyze and focus on specific sections and departments in an organization. That’s critical to find out the performance and strategize.

    You can evaluate the best-performing sales strategy and emulate it with the rest of the team. Or find areas that need better financing and help improve it.

    An organization is like a machine. It is best to tram line all parts so it can work like a well-oiled machine.

    A budget or a financial forecast shows the potential of an organization in the future period. Investors and sponsors are interested in organizations that prove they can be vibrant in the future.

    A budget or forecast can show a detailed plan of what the business is planning in the future. That’s how investors can make an informed decision on whether or not they should join your organization.

    And, that’s just one of the reasons why is it important to update your budget and forecasts.

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    Advantages of updating a Budget

    There are lots of advantages to updating a budget and forecast. The budget is typically set once a year and is fixed for at least a quarter before revising.

    Mom-and-pop businesses often revise the budget quarterly. And larger ones will keep their annual budget fixed. Updating the budget helps determine sales targets and limits expenditure at a more realistic level.

    Forecasts and budgets are set before the beginning of a financial period. And are fixed for at least a quarter before it is revised. Smaller organizations revise forecasts and budgets more frequently compared to large organizations.

    The budget update or revisions allow the organization to give targets and set expenditure limits. They outline allowances that are feasible for an organization.

    A budget is designed to give directions on future expenses and revenue. But as an organization’s life is so dynamic, the budget must be updated to meet change.

    A continuous budget or rolling budget is a continuous budget that is designed to be updated periodically. But a static budget stays the same over a year or more, depending on the accounting period.

    Since a continuous budget is an extension of the current budget, it may require more time and effort to update. One has to be aware of the current budget and fit it to the new needs of the business.

    Updating a budget follows an incremental approach where new plans are added or removed from the original budget.

    The strategy is very vital in micro-planning and management environments for improved monitoring and planning that allows the management more insight and reaction time to adapt to the changing business conditions.

    Budgets And Forecasts Aid In Current and Future Planning

    Budgets and forecast updates aid in planning and controlling more accurately and reduces the uncertainty of long-term budgeting as it is able to mirror the current policy and business needs.

    Revision helps the company control its finances better to reflect the market mood and meet the business goals. Revision is an aspect that makes a business more adaptive to the environment and hence guarantees better success in the long term and short term.

    Updating a forecast or budget helps a business to continually reinvent itself on its benchmarks. Updating a budget can help reflect the rapid changes in technology and government regulations that may either reduce or increase the overall business costs.

    Every budget is made based on given assumptions, and when the assumptions change, it is only prudent that the budget is updated to reflect a new set of business assumptions.

    Updating Forecasts and Budgets Enables You To Fix Problems

    Updating forecasts or budget enables the business to fix any problems and underlying financial assumptions with more accurate information that encourage better spending habits.

    On average, managers tend to spend more money than is required, but a good revised budget can be an eye-opener for better spending habits as firms can spot opportunities to increase efficiencies and close gaps where there may be problems.

    If you’re wondering why is it important to update your budget and forecasts, keep these factors in mind.

    It is a good practice to run a budget variance report that shows the actual results versus the budget or forecast targets to discuss the number and update the budget to reflect the numbers.

    Departments and areas that require more attention can receive more focus compared to those that have exceeded targets. Revision of budgets can help rectify any problems before they can cost the business entity.

    Forecasts Should Adapt to Changing Business Needs

    Forecasts should flex and change throughout the year to reflect the business position and pipelines.

    Challenging times like disasters, pandemics, and earthquakes may require a new way of thinking and hence adjusting the budget to help float and propel the business through the challenging times.

    The budget should be focused on the opportunities that can help keep the business stay afloat or even thrive in the market.

    From a startup perspective, budgeting is vital for securing sufficient funding to get through to the next stage in business. Specifically, this can make all the difference in securing future rounds of funding and an appealing exit.

    Forecasts need to be updated regularly as you grow to be accurate representations based on what you are learning as you grow, as well as to maximize valuation and potential investment.

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    Things That Affect a Budget Update

    Many factors can affect a budget and can result in a budget update and revision. Any of the factors can cause a variation between the actual expenses and the budgeted expenses that necessitates a revision or an update on the budget.

    Variable Expenses

    Variable expenses are the expenses or costs that change with how much business you are really doing. The variable expenses can change depending on the volume of the sales or business volume.

    The expenses vary depending on many external factors and may make big gaps in the budget. Inflation can be a big factor here.

    Fixed Expenses

    Fixed expenses are those expenses that a business regularly incurs, such as rent. The fixed expenses are easy to predict as they rarely change over a given period. The fixed expenses in some industries are at times the largest expenses in some industries and startups.

    Miscellaneous Expenses

    Miscellaneous expenses are those expenses that do not fit one category. The most common expenses are payment of shareholder dividends, bank interest rates, and some non-operational expenses.

    Unlike fixed and variable expenses, miscellaneous expenses may not be planned and may arise spontaneously and urgently. Why is it important to update your budget and forecasts? You’ll be better prepared for these expenses.

    Would you like more information about cost-cutting tips for startups? Check out this video I have created explaining in detail how that’s done.

    The Process of Updating the Budget

    Updating the budget is not an easy task as one has to go through a lot of steps that can help you make a more up-to-date budget. It is good to sit down and assess your budget and overall financial goals while updating your budgeting.

    The following are the most basic steps in updating the forecast or budget.

    Compare the Budget/Forecast Versus Goals & Results

    When the budget is created, it is good to track the expenses throughout the month. You can use spreadsheets, accounting books, and other online software to see areas where there is overspending, understanding, or any place where you have not reached your goals.

    When you have exceeded the planned budget, it is great to input austerity measures or reassign resources to departments that need the resource.

    If the budget or forecast is in deficit, then it is good to try and fix the budget or forecast to ensure the business meets the desired goals over the next month.

    Assess New Income and Expenses

    The forecast is designed to show your expenses and revenue over a financial period. Revenue and expenses may vary from time to time, and any update on the budget should reflect the new changes.

    The changes in income can be nominal or even be a result of changes in foreign currency exchange rates, change in prices of goods and services consumed by your service.

    Review the Business Goals

    Companies change goals for many reasons. The changes can result from both external and internal drivers to the business. Internal drivers may include a change in leadership, financial goals, or business direction.

    External drivers to change business goals may include technological innovations or survival in times of crisis such as a pandemic.

    When the current budget or forecast is not generating the necessary profits to attain the change required, revisions to goals and spending buckets should be addressed.

    And, the first step in doing that would be to understand why is it important to update your budget and forecasts.

    Modify the Budget to Meet All Changes

    After going through all the changes in various aspects of the budgeting process, it is time to start adjusting the budget.

    First, make the budgeting changes and make sure the expenses and revenues are as realistic as possible. Then, identify any budget shortfalls and meet them.

    Budgeting Tips

    When updating your budget, it’s great to try and follow standard conventions to ensure the forecast or budget is sustainable as the budget acts as a blueprint the business follows.

    As well as to maintain credibility with investors. You can follow the following budgeting guidelines in updating the budgeting.

    Follow Industries Standards

    Different industries have different budgeting needs, and the needs in the budgets may vary from business to business. That may result in small changes in the overall layout of the budget. You can do your own research or get assistance from an accounting firm, or an in-house bookkeeper to help you make the budget.

    Use Technology

    When creating a budget, make sure you digitize it using spreadsheets, apps, and software to help you manage the budget. A digital budget is easier to update and to dissect different sections of the forecast or budget to see the most successful aspects and those that are trailing behind.

    Allow Some Slack

    The business budget is designed to generate a given income and use fixed expenses in the same period. The expenses or revenue may vary depending on the season, or other external conditions. The budget or forecast should give room for such changes.

    Business processes are not fixed in stone, and updating the budget gives businesses room to adjust goals. You should update the budget or forecast to keep the business goals relevant and practical at a given period while optimizing growth and fundraising potential.

    Understanding why is it important to update your budget and forecasts is a great first step in the right direction.

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    Neil Patel

    I hope you enjoy reading this blog post.

    If you want me to help you with your fundraising, just book a call.

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