CAVU

What’s the Forecast? Your Guide to Budget Forecasting

Now that you know how budget forecasting can help you answer your burning questions (see part 1 of this series). Here’s how to properly prepare to forecast.

Budget forecasting uses your business’s existing information and reporting data to construct an annual financial forecast model.

Budget forecasting models are custom-built for your business, but they’re only as good as the information you feed them. You need to have the right input to generate the highest quality strategic output.

Before you begin the budget forecasting process, you’ll want to:

  • Prepare your sales pipeline and forecast
  • Estimate your labor and utilization costs
  • Estimate your capital assets
  • Prepare your statement of indirect expenses
  • Document key business assumptions
  • Note the timing of awards

Ideally, your forecasting model will have a performance dashboard that provides you with immediate access to the data you need and turn that static data into dynamic key indicators.

The model then functions as a living document that provides the financial and metrics reporting you need to work through your critical business decisions, allowing for real-time planning.

Reap the Benefits

A well-constructed financial forecast model provides the following benefits:

1. Anticipate Your Tax Outlook

An annual financial forecast model provides visibility into your projected tax position. You can then schedule regular reviews to monitor progress toward pre-determined tax goals, including your action plan for year-end transactions.

2. Forecast Your Indirect Rate

Budget forecasting can give you a clear picture of current, year-to-date, and year-end rates and multipliers. It also allows you to get accurate rate impact assessments and a comparison of your indirect rate forecast and target rates.

An effective forecast will allow you to scale costs as you make changes to your business base. For instance, fringe benefits like FICA and medical expense will change when you change new hire assumptions. Then you can calculate complete indirect rate forecasts for future bidding and other business decision making. For example, when you win the next big bid you will know the dollar amount you can reinvest in your infrastructure, or you will know that you can reduce your bid rates to remain competitive with overall proposal pricing. Or do some combination of the two. You can see your choices in dollars.

3. Plan in Real-Time

Your model can function as an overall forecast platform as it integrates actual results for a continuous year-end outlook. It’s a living planning model that updates based on the latest known assumptions for new business and award timing.

4. Plan for Possible Scenarios

Budget forecasting allows you to run “what-if” scenarios and see how they would impact business, as well as how it would affect other areas such as staffing needs and profit.

You can then plan for scenarios, such as:

  • The effect of changes in contract volume on staffing, HR, finance, project management, etc.
  • The cost impact of a business slowdown or delay in business.
  • The impact of business changes throughout the year on staffing needs and profit.
  • The sensitivity of changes in key forecast variables on bottom-line financial results.

You can then adjust your strategy throughout the year and understand in detail how key variables can affect your bottom-line financial results.

5. Understand Your Financing Needs

A financial forecast model can give you the ability to review cash and line of credit requirements and provide accurate information to bankers to secure financing that matches your business needs.

Gaze into Your Future

Budget forecasting with the right metrics can help you create a more predictably profitable future.

Reach out to CAVU’s finance and accounting team to take your annual financial forecast model to the next level with a customized performance dashboard that adjusts to reflect shifting business conditions.