When was the last time you thought about money? It probably wasn’t that long ago if you’re the CEO of a high-growth company. Cash flow questions and worries go with the territory. But you knew that going in, and you have the stomach for it.
In the beginning, you could keep up with the numbers. Now, after several record quarters in a row, the numbers are getting bigger, and planning for what happens next is getting more complex. This is when CEOs usually start considering a virtual CFO.
Deciding who to share your finances with is one of the most important decisions you’ll make at this stage in your business. This post prepares you to vet virtual CFO partners by summarizing the differences between a budget and forecast – two of your most powerful financial decision-making tools.
Keep reading for the key differences between budget and forecast.
What are the key differences between budget and forecast?
Financial terms can be used interchangeably or differently depending on your background. From our perspective, two things separate the idea of budget and forecast: timeframe and decision-making insights.
- Budgets focus on where you stand and what happened to get you there. During the process, you’ll look at your income sources, expenses, cash reserves, and debt. The overview is then used as a benchmark to measure performance. These numbers are relatively static because they are usually short-term or moment-in-time snapshots.
- Forecasts project what your finances will look like in the future. Various methodologies are used in this stage, and the data is used both for the short- and long-term. Forecasting is a more dynamic process, and you may make adjustments as your business or the marketplace change.
Why are these differences between budget and forecast important?
If you’re considering working with a virtual or fractional CFO, it’s essential that you clearly understand what to expect out of the relationship. This includes how you’ll start, what you need to provide, how to use the information to move the business forward, and when to revisit decisions.
Our budgeting and forecasting approach
Virtual CFO services can vary from firm to firm depending on industry focus or client mix. We’ve refined our services at Ledge Financial after working primarily with software, technology, and professional services companies. Our experience informs our approach. Following is a high-level overview.
Let’s cover something right off the bat. We’re not big fans of the word budget. It triggers many people who find the idea of a budget restrictive or punitive. That’s not how we operate. Instead, we view a budget more like a spending plan or a snapshot taken at a particular time.
We start our engagements by clearly understanding your numbers using a standard formula. This can be challenging, but our formula makes the process transparent. When you complete this step, you’ll have cleaner data and better insights downstream. So it’s essential to do it first and get it right. Then you’ll have more accurate and meaningful benchmarks to inform your subsequent decisions.
From here, we get into the spending plan. The goal is clarity for better decision-making. Once everyone feels good about the numbers, we turn our attention to the future.
Now we’re in more dynamic territory. We build a long-term view of your overall financial position. There are several forecasting methodologies, which we’ll walk you through based on your goals. In some cases, we may step back to reassess the spending plan, but we stay focused on the future most of the time.
Our software tools can provide you with reams of data. Instead, we determine what matters to you and agree on metrics upfront. Then, as long as everything’s tracking, we’re good. If not, our team will help you get to where you want to be. Every month we’ll decide whether to revisit the forecast if market or economic indicators projections shift.
We keep you focused on the metrics that matter most throughout the process so you can handle spreadsheets, presentations, and pivot tables. And because we serve a specific niche, we have proven systems that have helped hundreds of companies stay on top of their finances.
Need budgeting and forecasting support?
Now that we’ve broken them out separately, it’s a little easier to see the key differences between budget and forecast. But for more clarification or insights, we are always here to help.
Although we’re full-fledged number geeks, our passion is building relationships. We want to get to know you, understand your why, and help you achieve your growth goals.
Whether you need help with budgeting, forecasting, tax planning, or tax preparation, we can look at the whole picture of your business and create a financial plan that actually works. Ready to get started?