Time spent forecasting

My experience from working with small and medium size companies in a variety of industries shows that the majority of companies spend little or no time at all on budgeting, reforecasting and reporting actuals vs. budget numbers, other than the annual budget preparation that is usually approved prior to the start of a new fiscal year but is never really relied on during the new year.

This is primarily due to the fact that annual budgets are still completed in most of these companies using spreadsheets which were never designed to perform these tasks for many reasons that finance executives and professionals are beginning to discover.

In order to make the planning, budgeting and analysis more meaningful and actually useful to management, these companies must make the transition from these spreadsheets to a purpose designed application, one that allows them to build a budget using already built-in business logic that they can adapt to their industry and type of business, and built-in accounting rules that will translate the finished budget and all its versions and re-forecasting activities into a set of financial statements, including a complete and accurate Balance Sheet and a Statement of Cash Flows, making the budget driven financial statements an extension of their actual accounting system into future, budget periods.

When companies transition to this type of an environment, more time will be spent on analysis and better and timelier decisions can be made by management.

Any other method, especially one that relies on spreadsheets or on user supplied formulas, functions and links will be incomplete and inaccurate and will discourage its users from continually using it throughout the year.

We are a small company and spend a significant amount of time budgeting and forecasting. However, that is the business we are in so that may be part of the reason we do it. Also, I've worked with a number of companies over the years and some very small ones still spend a significant time budgeting and forecasting. In my opinion the ROI on the time spent forecasting is high, while the budget side of the equation is less valuable. Budget's are good for some things, like forecasting margins based on known changes to the cost of good sold or cost of services provided. It allows for a view of any potential changes to the gross margin. However, the additional SG&A items are probably much less value add time for a smaller company. On the other hand, the forecasts are very important to manage cash flow and short term profitability.

There are really two questions here. How often should I forecast and how much time should be spent on the forecast? Somewhat dependent on each other but not completely.

How often depends on how fast your business changes. This could mean monthly updates, quarterly, etc.

How much time spent on forecasting depends on the complexity of your business and how efficient you are with Excel modeling.

As an SMB CFO, I use spreadsheets and have developed a detailed financial statement model. For me, the financial cost and time cost of a budgeting application is too great. At larger organizations, a budgeting application is a must-have and I have implemented them in the past to great success.