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Skip to 0 minutes and 4 secondsWe've seen that a business plan is essential to to help a business survive in its initial days. But even once a business is established, it will still need to plan for future growth. Planning is an ongoing issue for all organisations, and a loss of concentration during the planning phase can easily lead to mistakes being made which could cause problems later on. Save the Children International is a one billion dollar organisation. It's massive We work in 130 countries. So to do that we need to make sure that we are clear about what our plans are, what our income is going to be, and making sure that we can match those two together.

Skip to 0 minutes and 42 secondsEven though we're not generating a profit, our fund raising side of things is effectively making sure we're getting in the income to implement the programmes that we want to do. We'll have some money set aside for emergencies, but we also have the resources in terms of human capacity, to be able to mobilise very quickly, be on the ground and start implementing emergency response very quickly. Obviously Save the Children, having been around for a long time, we've got a lot of experience in making sure, how to manage the resources.

Skip to 1 minute and 10 secondsAnd that's why we do ensure that we have the buffer, if you like, to make sure we can start programmes quickly while the more usual donors come in with the long term funding for emergencies. Forecasting the future can be as much an art as a science. Typically, established businesses will go through an annual planning process. During this stage, budgets are produced by process of discussion and negotiation between managers. These budgets may be updated at any time to reflect changes in the business environment or externally, as well as changes to how the business is running.

Skip to 1 minute and 47 secondsFor example, if a chain forecast sales of 500,000 pounds, but a branch then closed part way through the year, the budgeted sales will be amended or re-forecast. The distinction between a budget and forecast is that, while a budget is a plan of what management wants to achieve in financial terms, a forecast is a prediction of what might happen in the future given external and internal factors affecting the business. A key responsibility of the finance team is looking at budgets and comparing them with the actual financial performance of the business.

Skip to 2 minutes and 23 secondsThe reasons for differences, or variances, are investigated by the managers responsible for that area of the business, with the aim of fixing any problems, because problems in a business tend to cost money. At this stage the emphasis is not just on what variances have arisen, but why they have occurred. This could indicate problems with internal processes such as buying, production, or service. Or, it could indicate that the budgeting process was inaccurate in the first place, and needs to be improved for next time around. The important thing, really, is understanding what is the reason for that variance, and sometimes it's a timing thing, where some of the sales for next period have actually happened slightly earlier.

Skip to 3 minutes and 6 secondsSo we might see less sales next period and more sales this period. Or, you might need to understand whether, actually, this is the true overspend and someone has actually spent more than they need to. As we have said before, it is about taking meaningful data and using it to tell a story.

Plans, budgets and forecasts

In this video, we’ll see how budgeting and forecasting are essential for any organisation to plan for the future and stay on track.

As Alice explains:

  • a budget is a plan of what an organisation wants to achieve financially;
  • a forecast is a prediction of what might happen in the future as a result of external and internal factors and their impact on the business.

Comparing budgets and forecasts to an organisation’s actual performance provide a crucial guide to how the business is performing, as several of our business experts explain.

What’s next?

In the next step we’ll see an example of how these comparisons of budget to actual figures work in practice, and how the information can be interpreted to tell a meaningful story about business performance.

Have your say

Do you think budgets or forecasts are more important, and why? Post your views as a comment.

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This video is from the free online course:

The Importance of Money in Business

University of Leeds

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