Budgeting and Financial Forecasting – 2021

Investopedia states the definition of a budget as “… an outline of expectations for what a company wants to achieve for a particular period, usually one year.”

Budgeting effectively represents your company’s financial position, goals, and cash flow. Due to the ever-shifting nature markets, budgets are often reassessed once per fiscal year. However, this scheduling decision lies with upper management or dedicated financial department and will vary based on business type.

There is no one budget strategy that will suit all business types – many businesses must remain financially flexible throughout the year, so must be able to recalculate and adjust. Characteristics of budgeting include:

  • Revenue and expenses estimate.
  • Cash flow estimates.
  • Expected debt reduction.
  • Comparison with actual results to calculate variance.

Financial Forecasting on the other hand “… estimates a company’s financial outcomes by examining historical data. Financial forecasting allows management teams to anticipate results based on previous financial data.” – Investopedia

Proper financial forecasting allows for management teams to make adjustments at production and inventory level by analysing historical data. Financial forecasting is often completed looking at the short term or upcoming financial year, but long-term financial forecasting can assist management in developing the business plan. Characteristics of financial forecasting include:

  • Can be created for both long and short-term. The need for forecasting to be completed changes throughout the year.
  • Often used in budget allocation calculations for future time-period.
  • Financial forecasting (unlike budgeting) does not analyse the variance between forecast estimates and actual obtained results.
  • Often financial forecasts are updated (monthly, or quarterly for example) following a change in operation, inventory, or business plan.
  • Management are able to immediately implement findings of financial forecasts.

So, although they are both incredibly similar – they are not the same thing. Budgeting includes an outline of the direction that company management would like to steer the business in, whereas financial forecasting is simply a financial report that outlines whether the business is meeting budgeting goals and or other goals. Usually, successful businesses will use both in tandem with one another.

Budgeting and Business Energy

As you will find out later on in this article, businesses across the UK are spending millions of pounds on their business energy. Due to the nature of the energy-market and its’ incredible price-volatility – it is historically been a nigh on impossible task to complete an accurate budget for this expenditure. 

With the advent of smart meters – the tide seems to be turning slightly. Smart meters now offer an inexpensive consumption data collection tool to businesses and domestic customers. This is a crucial change in the landscape for those out there who would like that extra control over their energy expenditure.

Average Energy Bills for UK businesses.

Business SizeEmployeesCost (£/year)
Micro-Business1-91,735
Small Business1–493,507
Medium Business50-2506,462
Large Business>25011,978

How to Immediately Reduce Expenditure on Energy Bills

Because energy bills are often calculated relative to monthly consumption, it is quite easy to make an immediate reduction by reducing usage. For any businesses looking to make a quick saving, often all that is needed is to introduce a new energy-saving technique or technology.

Here’s a few ideas to get started:

  • Install timers on lighting.
  • Install timers on HVAC systems.
  • Replace old or outdated electrical equipment.
  • Ensure all appliances are turned off before exiting store/premises.
  • Install eco-friendly bulbs.
  • Adjust heating in response to external temperature.

Implementation of these ideas and others similar is already widespread throughout the UK. Savings are often varied – businesses with poor energy consumption habits standing to save the most while for others it is unlikely that they will see a huge return for their efforts.

For the other businesses (those with good consumption habits, or of a larger size) there are two other ways in which you can slash your energy bills.

Firstly, change supplier! It is incredibly unlikely you are already getting the ‘best deal’ available to your business – especially if you have been with your current supplier for a long time. Find your current contract terms and get searching for better offers. Even small savings in the unit-rate of energy can be extrapolated into vast sums over the course of a year!

Secondly, brush up on your budgeting skills! Whether you operate a huge multinational corporation, a small to medium-sized business, or a solo business venture – developing financial literacy is the key to serious savings!

Top Tips on Energy Budgeting and Forecasting

  1. Research what data is needed: This is particularly important for smaller-sized businesses who do not have access to vast resources. It is a good starting point to try to outline the parameters of the budget and what data will need to be monitored (or is collected already). Understanding your specific business needs before ploughing ahead attempting to create a budget ensures efficient use of time and allocation of resources. Understanding what level of information is needed will also help in identifying the right source and method of data collection.
  2. Gather data into one location: Following on from setting your principal requirements for data collection, the next step should be to gather any historical data on cost, consumption, or any other relevant metrics. Larger businesses may find it useful to use specialist energy intelligence software to tackle large data sets whereas smaller businesses may find this to be a wasted expense.
  3. Data-driven forecasts: Once this data has been collated it is worthwhile to spend some time trying to manipulate it so that it can be used to plan for the future. Again, businesses will have different approaches to this dependant on their scale. Smaller businesses will likely have to manually account for things like inflation during their calculations, while larger businesses will likely rely on specialist energy intelligence software.
  4. Track progress: Once you have calculated financial forecasts and budget it is important to continuously assess whether or not you are on track to achieve goals. This is another reason why historical data is so important. It is absolutely necessary to have access to this data to calculate overall savings or effectiveness of budget.

How to Energy Budget – for Beginners

  • Keep the bigger picture in mind: The energy budget is a piece of a much larger master financial budget, it is important to keep this in mind.
  • Set a deadline: This will keep yourself, or your staff on task. As budgets do have a knock-on effect on operations, it is not something you want to leave until last minute.
  • Determine time period: Decide on how long you would like to budget for. Base this decision off of available data, business needs etc.
  • Collect data: DO NOT MAKE ASSUMPTIONS. Everything from this point onwards should be data-driven (within reason). Ensure that you have access to all of the data you will need before beginning.
  • Make room for margins: No-one can formulate budgets or forecasts with 100% accuracy, the best just manage to get slightly closer to that number. Try to factor in room for error or ‘worst case scenarios’.
  • Begin the maths: This section is crucial to the overall accuracy and success of your budget or forecast. Try to archive and keep copies of any working out or reasoning, as it may be needed to locate mistakes further down the line.
  • Deliver: Finish the product before the due-date and distribute to relevant departments/people.
  • Monitor: If you do not monitor and reassess your energy budget, there will be no conclusions able to drawn on the overall efficacy. Keep track of budget vs actual costs, and dedicate time for revisions and corrections if necessary.

Energy Budgeting – Key Points to Take Away

You may have already guessed it – the key to successful budgeting for your energy consumption is data and expertise. It is not possible to draw any conclusions without data to back it up, and the data means nothing without the expertise to understand it…

So, what do you do? Spend hours of your free-time poring over figures that make no sense? Take a new job in the energy industry to grow your experience? Give up?

Luckily, at Energy Solutions we are energy-procurement specialists with well over twenty years of expert knowledge. We know how powerful data can be for your business and would love nothing more than to assist you by providing the tools you need for collection.

If you just want to have a quick chat about anything, energy related or not – we’ll be there. You can call us on 0131 610 1688 to hear more about our services offered, or just for a little bit of advice on your energy.

We look forward to hearing from you!

Common Questions

What is budgeting?

Budgeting is an outline of what a company would like to achieve over a certain time period. Usually this is yearly or quarterly. Budgets are calculated from known historical data, current data, and perceived future trends.

What is financial forecasting?

Financial forecasting is the process by which a business will estimate financial outcomes based off of historical data. Historical data can be used to identify trends, and anticipate future financial results (to a degree). Financial forecasts are crucial to formulating a budget.

What is the difference between budgeting and forecasting?

Although both are incredibly similar, one key difference is that budgets include a goal-driven direction that the management would like to push the company towards. Forecasting simply analyses financial futures from historical data, with no ‘directional push’.

How do I budget for a business?

It is no small feat! It is important to remember that all business needs are different, you should be prepared to be flexible with your approach so you can meet these at all times.

We have included top tips on how to budget for businesses within this article! It may be worth checking out.

How do I budget for my business energy?

It is no small feat! It is important to remember that all business needs are different, you should be prepared to be flexible with your approach so you can meet these at all times.

We have included top tips on how to budget for busines energy within this article! It may be worth checking out.

For more information about this post and how Energy Solutions can help with your Electricity, Gas, or Water, click on the links, or check out the contact details at the bottom of the page.