Defining goals
Some goals may be set by senior management, while others are determined by the individual department or unit. These goals will reflect both the organization's larger strategic priorities and the department or business unit's tactical goals. Examples of questions you might ask to help define your department's tactical goals include:
Setting assumptions
All budgeting requires making assumptions about the future. In many companies senior management will communicate key assumptions that are to be used throughout the organization—such as a 5% increase in salaries, or a 10% increase in sales volumes. In other cases the assumptions are specific to an individual department's activities.
Managers use a wide variety of data and approaches in developing assumptions, including historical trends, purchasing surveys, and industry projections. They also communicate with each other about their expectations for customer response, supplier performance, financial market fluctuation, and so on. Be sure to document all of your assumptions and keep notes of sources of information you use.
Beware of optimistic forecasts
Some goals may be set by senior management, while others are determined by the individual department or unit. These goals will reflect both the organization's larger strategic priorities and the department or business unit's tactical goals. Examples of questions you might ask to help define your department's tactical goals include:
- What technological changes are affecting the industry?
- How can current processes be improved?
- What longer-term initiatives need to be considered in order to position the company for the future?
Setting assumptions
All budgeting requires making assumptions about the future. In many companies senior management will communicate key assumptions that are to be used throughout the organization—such as a 5% increase in salaries, or a 10% increase in sales volumes. In other cases the assumptions are specific to an individual department's activities.
Managers use a wide variety of data and approaches in developing assumptions, including historical trends, purchasing surveys, and industry projections. They also communicate with each other about their expectations for customer response, supplier performance, financial market fluctuation, and so on. Be sure to document all of your assumptions and keep notes of sources of information you use.
Beware of optimistic forecasts
What you normally get, which is quite infamous, is the wonderful "hockey stick" forecast, where perhaps business isn't wonderful now so the graph comes down a bit. Then for the next four years it goes up, and the ending is always Y percentage higher than the beginning. First, one needs to understand why people do that.Be aware that any forecast for the future will be optimistic; and the further into the future the forecast, the more optimistic it will be. As forecasts can be enormously important, treat them with as much realism as possible because people are natural optimists and this is likely to be reflected in the numbers.
Using trends to predict sales
Sales projections for a given period are developed by product or product group. If you are forecasting product sales, consider whether it is appropriate to base your forecasts on current sales trends. Some factors to consider, in addition to overall demand trends for these types of products, are:
Using trends to predict sales
Sales projections for a given period are developed by product or product group. If you are forecasting product sales, consider whether it is appropriate to base your forecasts on current sales trends. Some factors to consider, in addition to overall demand trends for these types of products, are:
- The history of sales growth for your company's products
- Competitive products that have or may be introduced in the market
- Availability of substitute products
- Price sensitivity of purchasers
- Percentage of purchasers who demonstrate repeat purchases
- Planned changes in sales and promotion activities
Historical data and run rates
If historical sales data is used as a base for forecasts, determine whether it is appropriate to use annual data or the run rate.
The run rate is the extrapolation of current financial results out over a future period of time. For example, if December's sales are $75,000, the annual run rate ($75,000 multiplied by 12 months) is $900,000.
Annual data may be most appropriate for forecasting one-off product sales, while the run rate may be better if you are forecasting revenues for services sold under long-term contracts, or for recently launched products
If historical sales data is used as a base for forecasts, determine whether it is appropriate to use annual data or the run rate.
The run rate is the extrapolation of current financial results out over a future period of time. For example, if December's sales are $75,000, the annual run rate ($75,000 multiplied by 12 months) is $900,000.
Annual data may be most appropriate for forecasting one-off product sales, while the run rate may be better if you are forecasting revenues for services sold under long-term contracts, or for recently launched products
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