Why do many promising businesses start strong but struggle to survive after a few years (whether it’s a restaurant or a printing press)? Some businesses even have to shut down completely after opening with so much energy and presence. First, you need to understand that it is not from a lack of customers or marketing effort. The difference can be narrowed down to one skill; financial forecasting and budgeting.  

Making money is not in any way the same as building a sustainable business that grows.  If you’re reading this as a business owner, then it’s time to hatch a plan to ensure long-term success for your business. Let’s explore financial forecasting and budgeting: Why it matters, and actionable strategies you can implement.

WHAT IS  FINANCIAL FORECASTING AND BUDGETING?

Financial forecasting is the process of anticipating and estimating how much money your business will earn and spend in the future. This estimate is usually based on market insights, historical data, and current trends. 

Budgeting, on the other hand,  is the process of planning how your business will use its monetary resources. It’s the decision you make in advance about how much to spend and on what.

THE IMPORTANCE OF FINANCIAL FORECASTING AND BUDGETING.

Many entrepreneurs (whether product or service-based), small business owners, and petty traders are too focused on their daily profits. Although making a profit daily is a win, this makes them lose focus on long-term planning.  Here are a couple of case studies  that could explain this better:

• Imagine a toy store in Abuja, Nigeria that scaled up fast within six months of opening. They got so caught up with the rapid sales that they kept importing materials to reproduce without proper forecasting. When a recession hit, their sales slowed, unsold inventory piled up, and they struggled to pay their suppliers. Eventually, after eighteen months from their launch date, they closed permanently.
• On the other hand, a small bakery in Lagos, Nigeria was wise with their budgeting. They restocked and bought in bulk from their suppliers with proper forecasting and budgeting. When the economic recession came, they survived using their emergency funds. When the bread was low in demand because of its increased cost, they expanded into the pastry and acquired new clients. After the recession, they were back on their feet and had already become a renowned vendor for fresh bread and pastry.

5 TESTED STRATEGIES FOR EFFECTIVE FINANCIAL FORECASTING AND BUDGETING.

1. Set realistic projections:  

Avoid estimates or “guesstimates”, rather base your forecasts on data like your sales history, the market trends, and seasonal demands.  For example, a poultry farmer should expect higher demand for live chickens in the festive season. As for eggs, it is a consistent all-year-round sales/demand that does not need seasonal forecasting.

2. Monitor your costs:

Understand the difference between fixed costs (like rent) and variable costs (like raw materials or marketing). For example, an interior decorator must actively track the fluctuating prices of upholstery, curtains, and decor items.  

3. Plan for emergencies:

Emergency funds for businesses are not too different from that for personal finances. For business, your emergency fund should cover at least 3 months of your business’s operating expenses. If you are a service-based business e.g. digital marketer, this strategy is especially important, just in case there are delays in payments from your clients. 

4. Prepare for every scenario:

As much as it is great to be optimistic, it is also very realistic to plan for best-case, worst-case, and most likely financial outcomes. This helps you stay flexible and adapt quickly to whatever situation you find your business in.

5. Don’t forget to review your budget regularly: 

Your budget should evolve with trend changes, demand changes, and even exchange rate fluctuations. If you do not want an unpleasant situation to creep up on you, Keep an eye out from afar off, and adjust accordingly before it becomes urgent.

Some people wait until things get tough before taking action. Don’t wait for a crisis to start planning. Take these steps today:  

• Audit your current finances: Where does my money go?
• Make your job easier by using digital tools like budgeting apps, and accounting apps like QuickBooks
• Consult a professional if necessary.

It is time to build a sustainable future for your business!

At Biz Vital Signs, we help SMEs build strong financial strategies. Want to speak with an advisor? Schedule your meeting today to get started.