Forecasting and Budgeting

Forecasting and Budgeting: Planning For Future Success

John Dunn Accounting Practice for Managers Professor Gohary November 29, 2013

Forecasting and Budgeting

Forecasting and Budgeting: Planning For Future Success

Each day, every single person in some way shape or for uses forecasting budgeting techniques in their lives. Whether that is on the job, deciding how much one can spend at the supermarket, deciding upon different television sets, or simply planning how to accomplish all the days tasks in limited time. Forecasting and budgeting has many uses and is made up of several components but the bottom line is that it is essential for success and charting a path towards a goal. In this paper we will discuss: What is forecasting and budgeting and why are they so effective and important? What is the role and process of budgeting is in my current workplace? When does the forecasting and budgeting stop? Having a clear sense of what one needs to expect, what resources are available to work with, and what level of production is needed is very important to running an effective and efficient organization. What is forecasting and budgeting and why are they so effective and important? A website by SSSHED provided a great example of why forecasting and budgeting are so important. The example asked the reader to imaging that they are an airline pilot. Essentially, the flight, crew, passengers, and companys reputation are in your hands. In order to make sure that everything is successful and safe there are a number of steps that must be taken. Weather needs to be checked, the cabin needs to be stocked, orders to crew and passengers need to be given, fuel tanks need to be full, and keep everyone up to date on any inflight factors that may alter the experience. (SSSHED, 2013) As you can see the planning that goes into the flight is not simple and does not stop when the passengers come aboard the plane. One must prepare for the expected, unexpected and everything in between.

Forecasting and Budgeting

Forecasting is a process of predicting or estimating the future based on past and present data. Forecasting provides information about the potential future events and their consequences for the organization. It may not reduce the complications and uncertainty of the future. However, it increases the confidence of the management to make important decisions. (Akrani, 2011) Predicting the future is never an easy task, but like the aforementioned definition describes it can be paramount in helping build budgets and allocating funding and resources to certain areas. Without proper forecasting and planning, production amounts, resources used, and in the end revenue will be greatly effected either buy over or under allocating. What is the role and process of forecasting is in my current work place? The primary reason for me to explore budgeting and forecasting in this paper was to look deeper into how my agency goes about the process. My agency, part of the Commonwealth of Massachusetts, is the only one that runs on zero-profit. It is very important that we come as close to this zero-profit as possible for a number of reasons. First, if we do make a profit we are not allowed to keep any of the funding for operations for the next fiscal year. That money is returned to the states general fund. Also, the agencies that we provide services for will not be happy and look elsewhere for business because this means that the rates that we are charging them are higher than they should be. On the other hand, if our forecasts are off and we charge too little and do not get to our break-even point, we will need to find some other way to make up the funds that we were unable to collect. Our products and services we offer run on the unique system called a chargeback method. This means that we pay out all of the money to provide these services, and then over the course of the year we collect the funds back based on usage amounts. To make sure this process goes smoothly there is a great deal of prep work, and the process is never-ending.

Forecasting and Budgeting

The process starts in November when we begin our business planning phase for the upcoming fiscal year beginning in July. During this time, all of the product managers layout all of the costs that are associated with their product or service including any overhead or expected maintenance, renewals, or depreciation involved. This information is locked down come March and is all sent over to the finance group. At this point, all of the costs are thrown into several costs pools. A good example of this would be an e-mail box that costs $10 for the storage, $5 for the firewall, and $500 overhead for the server. The $15 would be the charge that we would charge an agency for providing the mailbox and the server charge since it hosts all of the mailboxes would be split over all of the mailboxes we provide. This example is very simple since we are able to calculate the exact number of mailboxes that we provide and the costs are very clear cut. Where the issue becomes more daunting however is when the finance group has no way of knowing the exact usage and needs to use forecasting. Accurate forecasting is vital to our agency. When dealing with units that can reach the hundreds of millions such as sending and receiving files, or megabytes transferred, a bad forecast can mean the difference between losing or over collecting tens if not hundreds of thousands of dollars. During this process, the finance group reviews countless spreadsheets. Numbers are reviewed based on usage for the past 5 or so years. If a usage amount has stayed relatively unchanged, the forecast may stay the same. Having no change or very little change is fairly uncommon in the technology field of course. Often times, there will be a large swing as new products are designed, new features are added, or things are decommissioned. At this point we need to sit down and analyze what customers have been asking about it, what usage they may need and many other variables. If there is customer base outlined it is usually not worth it for us to move ahead because of the great financial risk. Many times, we will have multiple forecasts

Forecasting and Budgeting

that seem to project very different numbers for the same product or service and at this point decisions need to be made. This is the time where using a what-is analysis is very useful. A what-if analysis is a process of exploring changes in estimates on predictions in a financial model. This what-if analysis is used very often especial in my technological field where things are very uncertain. When it is difficult for us to tell exactly what usage amount to use in order to build the rate, we will often have two potential rates based on our estimates. One rate will be based on the best case scenario for instance if there is very high usage, while the other rate will be based on if usage is not at levels we expected. After having these two rates we then run the numbers to see how much the swing will be at the end of the year. Sometimes we will see that because the rate is so small the final number regardless of the usage is fairly similar and choosing a rate is easy. If the rate is still difficult to pick because there can be a large swing in profit of loss based on the usage it is always smart for us to be conservative. Being

conservative allows us to collect money for our services and if we find that the rates are bringing in to high of a profit we can then go about giving credits to agencies. After all, it is much easier to give someone back some money than to have to explain why you need to charge them more for the same offering. When does the forecasting and budgeting stop? The simple answer to when will the forecasting and budgeting stop is that it never will. Like in ones own life where every activity requires some form of budgeting and analysis the same is true in the business world. During our year we need to constantly analyze if usage will spike or drop in certain months due government regulations, increased employee vacations or some other factor. If any unexpected changes occur, we may need to re-forecast and come up with new rates on the fly. If rates seem to bring in above or below the expected revenue we may

Forecasting and Budgeting

need to adjust the budgets for our products and services. Forecasting is a very important step in the budgeting process that allows everyone to have a financial focus on what they can and cant do and the overall performance of what they are providing.

Forecasting and Budgeting

References
Akani, G. (2011, August 19). What is Forecasting? Meaning Features Steps Importance. Kalyan City Life. Retrieved November 29, 2013, from http://kalyan-city.blogspot.com/2011/08/what-is-

forecasting-meaning-features.html

Atkinson, A., Kaplan, R., Matsumura, E., & Young, S. (2007). Management Accounting (5 ed.). Upper Saddle River, NJ: Prentice Hall.
SSHED. (2013, January 9). Why is forecasting important to your business?. Retrieved November 29, 2013, from http://www.sshed.com.au/_blog/Blog/post/Why_is_forecasting_important_to_your_business/