Corporate Financial Forecasting: A Guide to Planning and Control

In any business – from startups to large corporations – financial forecasting is a core tool that helps managers plan development, allocate resources appropriately and cost management effective. The following article by Bizzi will provide specific instructions on methods and steps for effective financial budgeting.

General introduction to corporate financial forecasting

Prepare corporate financial forecast is the process of developing a detailed financial plan for a certain period of time, usually a year, in which a business forecasts revenues, expenses, profits, and capital sources to achieve business goalsThis is an important tool to help businesses manage finances effectively, make informed decisions, and control business operations. 

What is budgeting?

Dự toán ngân sách là một công cụ được các nhà quản lý tài chính sử dụng rộng rãi để hoạch định và kiểm soát các tổ chức. Nó được coi là “kim chỉ nam” định hướng các khoản thu chi của doanh nghiệp trong một thời kỳ nhất định. Ngân sách là một danh sách bao gồm tất cả các khoản chi phí và doanh thu được xác định từ trước theo kế hoạch của doanh nghiệp, tổ chức hoặc cá nhân. 

Financial budgeting helps in effective use of budget and is extremely important for every business.

The role and importance of financial forecasting

Financial forecasting is an extremely important step, bringing many benefits to the profits and operating efficiency of the business:

• Planning and control: A budget is a plan for the future, expressed in terms of quantity and value, that helps evaluate performance.
• Cost forecasting and calculation: Helps businesses stay on track, avoid overspending and balance departments for the next period's implementation plan.
• Resource Management: Helps to understand existing resources (people, assets, capital) and find ways to allocate them effectively.
• Cash flow control: Closely manage the use of funds, coordinate financial activities, control the implementation of financial plans, orient products/services to bring profits, and evaluate the performance of departments.
• Providing the big picture: Shows the financial situation and growth of the business during the planning period.
• Decision making basis: Supports managers in checking, evaluating, and adjusting financial decisions and business operations. Provides a favorable basis for making investment and financing decisions and increasing business value.
• Measure of performance: Use as a measure to compare reality with plan, to detect abnormalities, handle promptly and make appropriate adjustments.

Common types of budgets in corporate financial forecasting

A budgeting system is a collection of related budgets. Common types of budgets include:

• Master budget: Includes budgets for each department and the entire enterprise, providing a complete picture of the current financial situation.
• Operating budget: Estimate costs and revenues from daily operations.
• Cash flow budget: Forecast cash inflows and outflows, determine positive cash flow.
• financial budget: Strategic budgeting to achieve optimal resource efficiency.
• static budget: The data remains constant even if other factors change.

Preparing a business financial budget requires close coordination between departments such as sales, manufacturing, and purchasing. The sales manager provides sales forecasts to the production manager, who estimates how many units of products need to be produced. 

Based on the estimated production, the purchasing department estimates the quantity and value of raw materials needed. Sales forecasting also helps in estimating cost of sales and business management costs.

Methods of budgeting corporate finance 

Below is a comprehensive and easy-to-understand summary of budget-based corporate financial forecasting methods, suitable for presentation in internal documents, financial reports or financial personnel training slides:

Method	Detailed analysis
Top-down budgeting method	Characteristic: Budget figures are given by senior management and distributed to lower levels, often in a one-way manner without feedback from lower levels. Advantage: Fast. Disadvantages: Often inaccurate, especially when information from senior management is incomplete.
Bottom-up / Self-imposed budget method	Characteristic: Subordinate budgets (self-made budgets) are submitted to higher management for review before approval. Review and re-checking are necessary to avoid inaccurate budgets or too much autonomy. Advantage: All levels of the business are involved in the budgeting and costing process. Estimates tend to be more accurate and reliable. Managers work more proactively, comfortably, and have a higher chance of success because the budget is created by themselves. Disadvantages: It takes a long time.
Agreement Budgeting Method	Characteristic: Combining the two methods above, estimates are made based on discussion and agreement between management levels, always with feedback from relevant departments. Advantage: Estimates are highly accurate. Easy to apply. Disadvantages: Time consuming and costly.

Effective business financial planning process 

Below is a summary and standardization of the process. planning Effective corporate financial forecasting, suitable for use in training materials, internal presentation slides or practical implementation guidance:

Factors affecting budget planning

When planning your budget, there are three directly influencing factors to keep in mind:

• Balance Sheet: Reflects an overview of assets, capital and debts at a certain point in time, helping managers have an overall view of finances and allocate budgets appropriately.
• Income Statement: Profit and loss report reflects the production and business activities, helps determine the difference between revenue and expenses, and evaluates profitability. This is the basis for forecasting revenue, profit and proposing plans for the next period.
• Statement of Cashflow: Shows cash inflows and outflows, classified by business, investment and financial activities. Helps managers assess and control cash flow and payment capacity, as a basis for monitoring budget plans.

Detailed budget planning steps

• Step 1: Revenue Forecast
  • Consider actual sales of previous years and consider variables such as market share growth, customer demand, investment level, target market, new sales policies.
  • Identify revenue sources (from goods, investments, financing activities) and estimate expected selling prices.
  • Revenue forecasts can be prepared by account, by product group, or both.
• Step 2: Calculate capital and expected costs
  • Determine the cost of goods sold budget, total quantity to be produced to calculate direct costs (labor, materials, depreciation).
  • Carefully calculate non-production costs such as premises, R&D costs, design, marketing, customer service.
  • Note that expenses may vary or arise during production.
• Step 3: Balance between income and expenditure
  • After determining expected revenues and expenditures, it is necessary to review and balance revenues and expenditures, calculate profits, surpluses, and deficits to adjust the budget accordingly.
  • The software program can automatically determine profit after entering revenue and cost estimates.
• Step 4: Establish alternative scenarios and develop a plan
  • Contingency plans and alternatives should be available for situations that arise.
  • Testing different scenarios by hypothesizing is necessary.
  • Develop a budget plan by brainstorming ideas, explaining pros and cons, understanding tax laws, financial systems, considering health and safety issues and wage policies.
• Step 5: Implement, monitor and adjust
  • Closely monitor all activities to detect fluctuations and irregularities compared to the plan.
  • Determine the cause for appropriate treatment or adjustment.
  • Documents to keep a close eye on include portfolio reviews, insurance updates, cash flow statements, balance sheets, income statements, and market reports.

Forecasting key financial statements

Projected key financial statements include budgeted income statement, budgeted balance sheet and budgeted cash flowThese reports help businesses visualize the overall financial picture, make business decisions and raise capital effectively. 

Overview of financial statement forecast 

Financial statement forecasting is a very important content in financial planning work in enterprises. Financial statement forecasts are usually prepared for a certain period, usually 1 year. Financial statements that need to be forecasted include:

• Income Statement.
• Cash Flow Statement.
• Balance Sheet.

Inductive Method

The inductive method is the synthesis of all information from the annual budget plan – the budget. This method starts by synthesizing detailed information from the budget plans of each department or activity area.

• Advantage: High accuracy and reliability, suitable for large enterprises with complex business operations.
  
• Disadvantages: Requires close coordination and is time consuming.
  
• Income Statement
  
  • Is the process of researching and calculating revenue, costs and profits for a future period, usually 1 year.
  • Starting with forecasts of revenue, production costs, other expenses and ending with information on after-tax profits.
  • Need to master the report structure and how to calculate profit indicators, synthesize information from annual budgets and funds.
  • The process involves collecting information and input data (revenue budget, production costs, sales, management, investment, finance, taxes).
  • Prepare revenue forecast (estimate sales volume, average selling price, analyze revenue by product/region).
  • Prepare cost of goods sold budget (determine cost components, calculate cost/expected revenue ratio).
  • Prepare operating cost estimates (selling costs, business management costs).
  • Calculate profit indicators (gross profit, net profit, profit before/after tax) and analyze profit margins (ROS, ROE, ROA).
• Cash Flow Statement
  
  • To control cash flows, as a basis for preparing balance sheet estimates.
  • Is a summary of the company's financial changes, the difference between cash outflows and cash inflows during the planning period.
  • Need to master the indicators and structure of the balance sheet and the report on sources and uses of funds.
• Balance Sheet
  
  • To see the financial status of the company at the end of the planning period, reflecting the summary of changes in total assets, total capital and their structure.
  • Prepared based on the source and use of funds report and the opening balance sheet.

Percentage of Sales Method

Percentage of Sales Method is a method of financial forecasting in which cost and asset items are estimated based on projected salesThis method assumes that there is a stable relationship between sales and other financial factors. 

• Characteristic: Start by forecasting revenue and then show items that change in proportion to revenue. Items on the balance sheet and income statement that are related to revenue.
  
• Advantage: Easy to apply due to simple calculation, budget reports can be flexibly adjusted according to the company's goals. Time-saving and easy to implement, suitable for small and medium-sized enterprises.
  
• Disadvantages: The percentage change in revenue may not match the actual conditions of the business. Depends on previous period data, prone to errors due to assumptions and lack of details.
  
• Percentage of Revenue Budgeting Process:
  
  • Step 1: Look at historical data to identify metrics that change in proportion to revenue and calculate their % ratio.
  • Step 2: Forecast revenue for the planning period accurately.
  • Step 3: Calculate the ratio of change in revenue by taking the % ratio from step 1 and multiplying it by the forecasted revenue from step 2.
  • Step 4: Calculate the remaining indicators (not changing the ratio with revenue) and complete the budgeted financial report.
  • Step 5: Adjust the financial statement estimate if the indicators do not achieve the desired results or are not balanced (for example, total assets do not equal total capital).

Specific types of budgeting in business  

In business, there are many different types of budgets, classified based on many criteria such as time, relationship to the level of activity and economic content. Common types of budgets include: master budget, operating budget, cash flow budget, financial budget, fixed budget, and flexible budget. 

Sales budget

Serves as a starting point for a comprehensive budgeting process, starting with estimated sales for the coming year.

Production budget

Determine the quantity of products required to meet sales demand and the required inventory level. Based on forecasted sales, beginning and expected finished goods inventory.

• Recipe: Number of products produced during the period = (Expected ending inventory + Expected sales) – Beginning inventory.

Budget for purchasing raw materials

Determine the amount of raw materials needed to meet production needs. Determining the need is based on the nature of the raw materials (for example, scarcity increases the need for inventory). Normally, the forecast of raw material purchases is directly related to the production estimate.

For example: A shirt manufacturing company needs 2.4m2 of fabric for each shirt. If it plans to produce 650 shirts in October, it will need 1,560m2 of fabric (650 x 2.4m2). The company maintains an ending inventory of 25% of the next month's demand. From the production budget and inventory level, calculate the total amount of fabric needed for the month. Then, subtract the fabric inventory at the beginning of the month to get the amount of fabric needed to buy for the month.

Labor budget  

Determine the human resources required to meet production needs. Based on the number of direct labor hours required for each product and the average hourly labor rate.

General manufacturing cost budget 

Relating to production activities that are difficult to determine a direct link to a specific product. Often determining allocation criteria production cost General depending on product characteristics and management requirements (e.g., working hours, revenue volume).

Budgeting for sales and administrative expenses 

Includes costs such as advertising, marketing, shipping, administrative personnel costs, office expenses, and technology costs. Sales forecasting helps estimate these costs.

Cash flow forecast

Shows cash inflows and outflows during a business's operating period, divided into three activities: operating, investing and financing.

Applying technology to support financial forecasting for businesses 

Technology has been playing an important role in supporting corporate financial forecasting, helping to increase accuracy, efficiency and reduce risk. Specialized software and applications, especially AI applications, are being used to automate, optimize the budgeting process, analyze data and make more accurate financial decisions.. 

The role of accounting software in corporate financial planning

Expense management softwareBusiness accounting software can help quickly and accurately update information to plan detailed budgets. Software such as MISA SME.NET or CyberBook provide full financial accounting operations, helping to save time and effort, effectively managing financial work for businesses. They allow setting up general information of the budget, making revenue, cost, and profit estimates, and viewing actual analysis charts compared to the budget to evaluate effectiveness.

However, to keep up with the trend of automation and comprehensive financial digitization, Bizzi stand out from the crowd outstanding advantages. If your business is looking for a solution beyond the limits of traditional accounting software, Accelerating digitalization – optimizing financial operations, then Bizzi is a comprehensive, smart and trend-leading choice.

Bizzi: Trợ lý AI cho phòng Kế toán – tài chính

Bizzi is a technology solution that provides a comprehensive cost control system, acting as an AI assistant for the finance and accounting department in automating the revenue and expenditure process. The platform integrates more than 30 features to help businesses streamline and automate the cost management process, debt collection, and B2B payments.

Outstanding features supporting Bizzi's financial management:

• Business Expense Management (Bizzi Expense):
  
  • Set up budgets by department/project: Allocate budgets by group, department or project to control spending.
  • Monitor spending against budget and alert: Warning when spending exceeds the allocated budget.
  • Automated expense approval system: Speed up the approval process of spending requests.
  • Real-time expense tracking: Provides up-to-date information on business spending.
  • Expense report: Generate detailed reports on spending by category, department or project.
  • Flexible spending policies and approval processes: Establish and enforce policies to ensure compliance with company rules, defining approval processes by hierarchy, department or type of expenditure.
  • Attach spending to each project or task: Easy to track and report.
• Business Travel Management (Bizzi Travel):
  
  • Automatic flight booking: Integrate with ticket booking services so employees can book tickets quickly according to budget criteria.
  • Business expense management: Track all business expenses such as airfare, hotel, transportation, and food.
  • Business spending limit: Set spending limits for individual employees or business trips.
  • Work approval process: Require prior approval for business trips.
  • Business expense report: Provide a summary report of business expenses for each employee, trip, and department.
  • Over budget warning: Send notification when business expenses exceed limit.

• Processing, reconciling and managing input invoices (IPA + 3way):
  
  • Automatically process input invoices: Use Bizzi Bot with RPA and AI technology to upload, check and reconcile invoices.
  • Automatic invoice reconciliation – PO – GR: Reconcile invoice details with purchase orders (POs) and warehouse receipts (GRs) in real time to detect discrepancies.
  • Verify valid supplier: Check tax code, activity status on tax system.
  • Risky Invoice Warning: Detect invoices from suppliers that show signs of risk.
  • API Integration with ERP & Accounting Systems: Synchronize data with accounting software and business management systems.

• Accounts Receivable Management (ARM):
  
  • Automatic debt reminder: Create debt reminder process according to script via email, text message.
  • Track customer and supplier debt: Automatically record and track debts of each customer and supplier.
  • Debt due warning: Provides warnings when debt is nearing maturity or shows signs of being overdue.
  • Reconciliation of debts: Compare and confirm account balances with customers and suppliers.
  • Debt report: Create detailed reports on the company's debt situation.

• Electronic invoice (B-invoice):
  
  • Create electronic invoices according to prescribed standards: Meet tax authority requirements, XML/PDF format.
  • Bulk Invoice: Support issuing multiple invoices at the same time according to orders and customers.
  • Store invoices according to regulations: Storage system for at least 10 years, ensuring legal compliance.
  • Easy bill lookup: Search invoices by number, issue date, customer, tax code.
  • Integrates with accounting & ERP software.

Conclude

Making a business financial budget is an indispensable strategic activity, helping businesses proactively manage their cash resources, closely manage the use of cash resources, coordinate financial activities and control plan implementation. 

Applying budgeting methods with support from advanced technology solutions such as Bizzi will help financial managers have a comprehensive view, make more accurate and effective decisions, thereby increasing value for the business.

• Link to register for a trial of Bizzi products: https://bizzi.vn/dang-ky-dung-thu/
• Schedule a demo: https://bizzi.vn/dat-lich-demo/