Financial forecasting is essential as part of managing budgets
Looking ahead each month should be part of any budget monitoring routine. It should consider what part of the budget has been spent to date, how much budget remains; and is there sufficient budget to cover the future planned expenditure to the end of the year? The answers to the first two questions should be straight forward and available from the financial management systems. Regardless of the ERP/software being used, a report should be able to provide the spend to date and budget remaining. The first issue may be, is the spend to date accurate, complete, and up to date? (See future insights on commitment accounting). The topic of this insight is “future planned expenditure”. This is effectively a forecast, and it is required to “project the outturn”, that is how much will be spent by the end of the year.
The future forecast is likely to change each month due to internal and external factors. In month one, eleven months need to be forecast to calculate the end of year outturn. By month 10, only 2 months forecast is required, and the outturn should be more accurate.
Forecasting is not guesswork, neither should it be a mathematical calculation. Some organisations still divide a budget by 12 assuming the same expenditure each month, taking no account of the internal and external environment affecting expenditure. The forecasts for the end of year often bear no relation to reality, and hence “shock” when budgets are over or under spent at the year end.
Whilst the future cannot be known, the forecast can be based on assumptions that take account of what has happened in the past, and the likelihood of planned expenditure being greater or less as a result of all known internal and external factors. Each month the forecast assumptions should be reviewed and updated to take account of what actually happened. This continued adjustment will enable the outturn to become more realistic each month and enables quicker and smarter decision making.
Training all staff with budget responsibility is key to enabling smarter forecasting and more realistic outturns.
Finance for Nonfinancial Public Sector Managers is an easy read and provides even more insight.
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