In June a report by the Creative Industries Foundation and Creative England stated that creative industries generated 2 millions jobs yet only 38% had a business plan or forecast.
Trying to make decisions without knowing the outcome is difficult at best. You could say running a business without a forecast is like asking people to vote in a referendum without knowing the effects of the outcome….too soon?
But what’s the difference between a budget and a forecast and why do creative businesses need them? Let’s take a look.
Budget vs Forecast
So to understand why you might need both it’s key to understand the difference!
Budget
A budget is all about spend. Agencies are normally great at budgets, you understand that to make a profit on a job you need to understand the costs and how to keep those costs under control. Therefore they are often used to calculate the desired income on a job.
It also sets a benchmark for spending to ensure that a goal, usually profit, is realised.
Watch out…
Something to be careful of, however, is that where the budget is only done per job and not for the company as a whole, there is a risk that costs which aren’t specific to any particular job (often called overheads) are ignored.
For example, in isolation your budget shows all the jobs for the year create a profit of £100,000, great! But what if your overheads are £150,000.
So, if you do a budget for the company too, that’s ok? Well, it’s a great start and something all businesses should aim for but a forecast still plays a different role.
Forecast
If a budget provides a target to aim for, something to benchmark against, a forecast provides a prediction. Commonly based on historic data and some realistic assumptions of the future.
In many ways where budget is about spend and profit a forecast is about cash. As such a budget should be created in advance and left untouched whilst forecasts can be re-run over time to continue to monitor the predicted cash position.
So, how do you do both?
We love Xero and one of its many brilliant features is its Budget Manager, it allows you to enter a budget and then compare actual results against it. If you also use Tracking in Xero to monitor your jobs you can use this to create both company wide and job specific budgets.
For agencies there is also the new Projects feature to allow budgets that need to account for ‘time cost’ as well as expenses (So, for example, if you need to include in your budget a team members time at say £100 per hour).
But for forecasting and cash we take a step away from Xero (but always choosing an app that integrates!). For businesses that want easy access to a forecast we love Fluidly. It can create a forecast with a single click! By integrating with your Xero data it uses Artificial Intelligence to create a prediction of your business by analysing it’s history.
You can then, if needed, tweak the forecast for things you know will happen but that maybe couldn’t be worked out from what has happened in the past (such as a new member of staff).
By completing both you get a target for costs and spend and also a forecast that refreshes, enabling you to spot opportunities and threats to cash flow.
Want to know more? No problem, get in touch and let us show you how to use Xero and apps like Fluidly to gain better, real-time insight into your finances.
