Updated: September 11, 2023 |

Budgeting and forecasting: a quick and easy guide


Billy Russell
Billy Russell

Billy is an expert in the FP&A space. Before joining Cube at the seed stage, Billy found success as a tax advisor at companies like Grant Thornton LLP and Gemini.com. He holds a BA and MA in Accounting from William & Mary and splits his time between NYC and New England.

Budgeting and forecasting: a quick and easy guide

Navigating the financial future of a business isn't always straightforward. Luckily, mastering budgeting and forecasting can make all the difference. 

This quick and easy guide offers a clear roadmap, ensuring you're well-equipped for the journey ahead. Let's get started.

Billy Russell

Billy Russell

FP&A Strategist, Cube Software

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The core components of budgeting

A budget is a financial plan that estimates revenue and expenditures over a specific period of time. It serves as both a roadmap and a benchmark, guiding businesses toward their financial goals while also allowing for a post-period evaluation of performance. 

By effectively planning, controlling, and evaluating finances, a budget provides a clear picture of a company’s financial health and future direction.

Budgets come in various shapes and sizes, tailored to different business needs. From operating and capital budgets to zero-based and flexible budgets, each type offers a unique approach to financial planning and resource allocation.

Key elements of a budget

Diving deeper into the structure of a budget, there are pivotal elements that form its backbone. These foundational pieces determine how you predict, analyze, and adjust your financial planning:

Fixed vs. variable costs

Fixed costs are those expenses that remain constant, irrespective of the level of goods or services a business produces. Examples include rent, salaries, and insurance.

Variable costs, on the other hand, fluctuate depending on the volume of production or sales. These can include costs of raw materials, commissions, or utility bills that vary with usage.

Income projections

This is an estimate of the revenue that a business expects to generate in the future. It's based on historical data, current market conditions, and any anticipated future events. This component is crucial as it helps businesses plan for growth, understand potential shortfalls, and make informed decisions.

Capital expenditures (CapEx)

Capital expenditures refer to funds spent by a company to acquire or upgrade physical assets such as property, industrial buildings, or equipment. This is important to consider in budgeting as these expenses are often significant and can influence a company’s financial flexibility and growth potential in the long term.

Budget timeframes

Differentiating between the various timeframes is crucial for effective financial planning. Here's an overview of the most common budgeting durations:


An annual budget provides a comprehensive view of a business’s financial strategy for the upcoming year. This overview helps in setting clear goals, prioritizing initiatives, and allocating resources for the entire year.


Quarterly budgets are broken down into three-month increments. They provide a more detailed and near-term view of a company’s finances, allowing for adjustments based on performance in the previous quarter. This granularity helps in quickly addressing any challenges or capitalizing on emerging opportunities.


Monthly budgeting offers the highest level of granularity. It's particularly useful for newer businesses with more volatile incomes or expenses, or for businesses that require tight financial control. Monthly reviews ensure that the company remains on track and can swiftly respond to any unexpected financial events.

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A closer look at forecasting

While budgets are formulated well in advance, relying on a specific set of assumptions, their relevance can diminish if these underlying assumptions shift. This is where forecasting steps in, addressing the time-sensitive requirements that budgeting may not cater to.

Forecasting helps in predicting future financial outcomes based on past and current data. Both budgeting and forecasting deal with future finances, but they serve different purposes.

While a budget lays out the financial plan for a specified period, detailing where the organization intends to allocate its resources, forecasting is an ongoing process of estimating future financial outcomes. In other words, a budget is a fixed financial plan set at the beginning of a period, while forecasting is dynamic, regularly updated as new data comes in.

Types of forecasts

Though numerous others exist, let's touch upon three prominent types of forecasting:

  • Financial forecasts: Typically, these predict revenues, expenses, and profitability over a specific period. They're vital for managing cash flow and understanding future financial health.

  • Operational forecasts: These involve predictions about business operations, such as sales volumes, inventory levels, and production costs. They often help in the day-to-day management of the business.

  • Strategic forecasts: Focused on long-term projections, these forecasts help businesses in strategic planning and decision-making, assessing market trends, and understanding the broader industry landscape

The role of qualitative and quantitative data in forecasting

Transitioning from forecast types, understanding the balance and significance of qualitative and quantitative data is essential for precise forecasting.

Quantitative data are numerical data, often from past performances, such as sales figures or production costs. This hard data forms the backbone of most forecasting, providing a factual base to make predictions.

Qualitative data, on the other hand, encompasses non-numerical information, such as expert opinions, market research, and other subjective factors. While it might seem less concrete, qualitative data offers invaluable insights, especially in scenarios where quantitative data might be limited or not applicable.

4 key steps for effective budgeting

After gaining a comprehensive understanding of forecasting, the next natural step is to dive into the actual process of budgeting. Much like forecasting, budgeting requires a structured approach and an understanding of both past trends and future objectives. 

Here's a step-by-step guide to ensure you craft an effective budget that aligns with your company's financial goals.

1. Goal setting: Aligning with organizational objectives

Before even crunching the numbers, it's essential to understand where your organization wants to go. Setting clear objectives at the outset ensures that your budget is purpose-driven and aligned with the broader goals of the business.

2. Gathering historical data

Past performance can be a reliable indicator of future trends. Reviewing historical data will provide insights into seasonal trends, past successful strategies, and areas that might require additional investment or cost-cutting measures.

3. Engaging stakeholders: Collaborative budgeting

Budgeting shouldn't be a solo effort. It's crucial to engage various departments and stakeholders in the process, ensuring that every aspect of the business has input. This collaboration makes the budget more accurate and ensures buy-in from all parts of the organization.

4. Finalizing and gaining approval

Once you've outlined the budget, it's time to review and gain approval from senior management or the board. This step ensures that everyone is on the same page and that the budget aligns with the company's overarching financial strategy.

3 essential forecasting techniques

Moving from budgeting, forecasting brings its own set of tools to the table, each designed for flexibility in an ever-evolving business world. Let’s break down a few of these key techniques and see how they fit into the bigger picture.

Time-series forecasting

At the heart of many forecasts is a simple principle: the past can inform the future. Time-series forecasting revolves around this, leveraging historical data to predict future outcomes. Within this approach, there are several methods:

  • Moving averages: By taking average values over a specific period, we can smooth out anomalies and spot underlying trends. Consider a cafe that observes its weekly coffee sales for a year; moving averages might highlight a consistent increase during winter months.

  • Historical trends: This is a direct examination of past data trends to inform future predictions. A toy store, for example, might always see increased sales in December; recognizing this trend helps plan for stock and staffing needs.

  • Seasonality: This entails identifying and accounting for patterns that recur predictably. A beach resort would, understandably, forecast higher bookings during summer compared to winter.

Qualitative methods

While numbers and data trends provide one side of the story, qualitative methods offer a different lens—one that’s more human-centric.

For example, market research is about diving into the subjective. By engaging directly with your audience, be it customers, competitors, or industry pundits, you glean insights that hard data might miss. 

For instance, a software company considering a new feature might conduct focus groups or surveys to gauge potential reception.

Quantitative methods

These methods bring structured data and mathematical rigor to the forefront of forecasting.

For example, beyond simple projections, scenario planning is about crafting multiple potential futures. By envisioning various possibilities—like best-case, worst-case, and likely outcomes—a business can create comprehensive strategies. 

Imagine a manufacturing firm considering the ramifications of a new trade policy; scenario planning can help navigate potential hurdles and opportunities.

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Embracing technology

As the financial world evolves, so does its toolbox. The emergence of FP&A software platforms has reshaped how finance leaders approach budgeting and forecasting. These tools aren't just about convenience—they offer transformative benefits.

In recent years, specialized software has been developed specifically for FP&A tasks, bridging the gap between traditional spreadsheets and complex financial operations. 

Some key benefits include:

  • Automation: Reducing manual input not only saves time but also minimizes human error. For example, software can automatically pull in sales figures, streamlining the forecasting process.

  • Real-time updates: No more waiting for quarterly reports; real-time data means making quicker, informed decisions. When a major sale happens or market conditions change, leaders can see it instantly and adjust accordingly.

  • Collaboration: Modern platforms often come with built-in collaboration tools, allowing multiple stakeholders to weigh in, view, and adjust projections in a unified space.

For a deep dive into FP&A’s hottest technology (including a list of the top 13 solutions on the market today, tips and tricks to guide you through evaluation, implementation, and more), check out The Ultimate Guide to FP&A Software.

Challenges in budgeting and forecasting

Even with the most sophisticated tools and seasoned professionals, budgeting and forecasting are not without their challenges. Recognizing these obstacles and preemptively addressing them can pave the way for more accurate and effective financial planning.

Unpredictable market changes

Economic fluctuations, emerging competitors, or sudden global events can swiftly overturn a meticulously crafted forecast.

It's essential to maintain flexibility in your projections and set up periodic review points. For example, if a new competitor emerges, assess their offerings and adjust your budget and forecasts to account for potential market share shifts.

Internal miscommunication

A lack of clarity between departments can lead to overlapping costs or missed revenue opportunities. Establish a clear communication protocol and ensure that all departments have a shared understanding of the organization's financial goals. Regular inter-departmental meetings, for instance, can keep everyone aligned and aware of any shifts in strategy or objectives.

Inaccurate historical data

Relying on flawed past data can set a shaky foundation for future projections. Ensure rigorous data verification processes. Audit past financial reports for discrepancies and ensure that future data collection methods are consistent and reliable. Using software that cross-references and validates data points can also aid in minimizing errors.

Best practices for successful financial processes

To ensure that budgeting and forecasting processes remain effective, finance leaders need to incorporate certain best practices. Here are some strategies to consider, backed with actionable tips, to maintain accuracy and relevance in your financial plans:

Regularly review and adjust budgets/forecasts

As the business landscape changes, so should your financial plans. An outdated budget or forecast can lead to missed opportunities or oversights.

Set up quarterly or even monthly review sessions to assess the current status and make necessary adjustments. For example, if sales have been consistently outperforming forecasts, it might be time to increase marketing spend to capitalize on this momentum.

Encourage feedback from all departments

Every department offers a unique perspective, and their insights can be invaluable in painting a comprehensive financial picture.

Consider holding inter-departmental brainstorming sessions or feedback loops. For instance, the sales team might have on-the-ground insights about customer behavior that can influence revenue projections, while the product team might offer details about potential upcoming costs.

Leverage industry benchmarks and standards

Sometimes, looking outside of your organization can provide clarity. Industry benchmarks offer a reference point to measure your company's performance against peers.

Subscribe to industry reports. If, for example, industry reports suggest that businesses of your size typically spend 10% of their revenue on marketing, and you're only investing 5%, it might be worth re-evaluating your strategy.

Conclusion: poised for progress

Through effective budgeting and forecasting, companies can stay ahead of challenges, seize opportunities, and ensure they're always moving in the right direction.

Want to learn how Cube can help you on this journey? Request a free demo today.

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