Budget Forecasting: 4 Techniques You Could Be Using

Finance Insights for Professionals

Finance Insights for ProfessionalsThe latest thought leadership for Finance pros

Thursday, September 12, 2019

Accurate budget forecasting can help you generate more revenue and hit your targets more often. But a budgeting approach that works well for one company may not be applicable to yours. Finding the most effective solution is key to achieving growth.

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Effective, reliable and timely budget forecasting is a crucial element in the success of any business. Indeed, a study from the Aberdeen Group discovered that companies with accurate sales forecasts are 10% more likely to enjoy year-on-year revenue increases, as well as being 7.3% more likely to achieve their goals.

With that in mind, it makes sense for you to devote plenty of time and effort to getting your budget forecasting spot on.

Part of the challenge here is choosing a budget forecasting technique that fits your needs, without being too strict or lacking sufficient detail.

While they might not guarantee financial success, the methods presented in this article can provide the insight you need to plan effectively for the future.

1. Top-down budgeting

Best for emphasizing performance goals

Under this model, funding levels for each department are decided upon by upper management to create a budget forecast for a given period.

The overall budget is informed by past and present financial data provided by department heads, as well as the expectations and performance objectives of the executive team.

While this method is highly effective in ensuring that each individual team understands what’s expected of them, it can also create a feeling of “them and us”, in which targets are viewed as unfair or removed from the daily realities of the business.
 

2. Bottom-up budgeting

Best for accuracy and departmental buy-in

As the name suggests, this is essentially the opposite of top-down budgeting. Department managers create their own budget, which is then passed up the chain to formulate an overarching forecast of revenues and company spending.

Given that heads of department should - in theory - be best placed to assess their team’s performance and capabilities, this method tends to produce accurate results. What’s more, by involving individual teams in the budgeting process, you’re more likely to get them bought into the results.

However, it’s worth noting that this approach can lead to less ambitious forecasts. Some managers prefer to “go easy” on their teams rather than pushing them to achieve more, while others may lack the foresight to understand how significant improvements can be made.

3. Zero-based budgeting

Best for eliminating wastage

With a zero-based budgeting approach, every line of the budget sheet is placed under scrutiny, giving you the best opportunity to identify areas of waste and eliminate them.

The name refers to the fact that all numbers are input from scratch. Regardless of whether a given activity has been performed once or hundreds of times, it must be given a projected expense, with nothing carried over from previous budgets.

Unsurprisingly, this method is likely to require a lot of effort on the part of your finance team and department heads. But it’s worth it to achieve accurate results.

4. Trending analysis

Best for matching your budget to market conditions

Budget forecasts are often too insular. Executives state their expectations; finance teams analyze previous performance; department leaders identify efficiencies; but no one stops to consider the state of the market and its impact on the business.

Performing a trending analysis can help you overcome this common problem. This report considers the wider trends affecting your business sector, from the activity of your competitors to the demands of your customers.

Running this analysis allows you to make budget adjustments based on market conditions. For instance, if dozens of new competitors have started to eat into your market share, it’s unrealistic to expect growth to continue at the same pace as previous years. Likewise, if you sell data security services and there’s been a spate of high-profile cyberattacks, you may wish to assume that your product will be in greater demand.

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