courses › Business Stats & Decisions

Forecasts & Budgets

level 30 course

Build a forecast from drivers, compare to budget, and don't mistake a run rate for a forecast.

Pen and paper is fine · no calculator needed why?

Opens at level 30.

Builds on: Percentages in Business (not open yet)

the lesson

The idea, the techniques and a tip for each skill, right here. The Learn page adds worked examples for every skill and untimed practice.

Read the lesson · about 3 minutes

The idea

A good forecast is built from drivers, inputs you can check: customers × price, or jobs × average job value. A number typed in because it feels right has no parts to check or fix.

Then compare plan with result. A variance here is actual minus budget. Its sign is not a verdict: above budget is good for revenue and bad for costs.

Beware the run rate, one month × 12. It ignores seasons and one-off jobs. For a seasonal business, forecast from the same month last year.

Techniques

Build it from drivers

Forecasting revenue from customers and price.

Name the drivers: how many customers, and the price each.
Multiply them.
Write the assumptions down, so anyone can check them.

worked example

Example: A plant-care service forecasts 48 full-month customers at $150 each. What is forecast monthly revenue?

50 × $150 = $7,500.
Take off 2 × $150 = $300.
$7,500 − $300 = $7,200.

Answer: $7,200

Actual minus budget, then judge

Comparing a result with its budget.

Variance is actual minus budget. Keep the sign.
Revenue: above budget is favorable, below is unfavorable.
Costs: above budget is unfavorable, below is favorable.
Then ask why it happened.

worked example

Example: Budgeted wages are $12,000 and actual wages are $12,900. What is the variance, calculated as actual minus budget? (Use a minus sign if negative.)

$12,900 − $12,000 = $900.
Wages are a cost, so $900 over budget is unfavorable.

Answer: $900

Same month last year

A forecast for one month of a seasonal business.

Run rate: one month × 12. It assumes every month matches this one.
Seasonal forecast: the same month last year × (1 + growth).
Growth of 10% means × 1.1.

worked example

Example: Last December's revenue was $30,000 and the business is growing about 20% a year. What is a seasonal forecast for this December?

Same month last year: $30,000.
$30,000 × 1.2 = $36,000.

Answer: $36,000

Tips by skill

TipDriver-based revenue: Multiply the drivers: the number of customers × the price each.
TipBudget versus actual: Actual minus budget, in that order. Keep the minus sign when actual comes in lower.
TipFavorable or unfavorable?: Ask what kind of line it is. Revenue above budget is favorable; a cost above budget is unfavorable.
TipRun rate or seasonal forecast?: Run rate: one month × 12. Seasonal forecast: the same month last year × (1 + growth rate).

Watch out for

Typing in a hoped-for number instead of building it from customers and price.
Subtracting in the wrong order. The variance here is actual minus budget, and the sign matters.
Calling any positive variance good. On a cost, a positive variance means overspending.
Treating one strong month × 12 as the year's forecast. That run rate assumes every month is as strong, and it ignores seasons.

skills · practice stats

From rounds of this course only: box, review and test-out answers are left out. Once a skill has 40 tries, it compares your first 20 tries with your last 20.

Driver-based revenue par 9 s not tried yet
worked example
Forecast 69 full-month customers at $300 each. What is forecast recurring revenue?

Answer: $20,700.00
1. Revenue = customers × price = 69 × $300 = $20,700.
2. Building the forecast from drivers makes it checkable.
Budget versus actual par 14 s not tried yet
worked example
Budgeted wages are $26,100 and actual wages are $28,700. What is the variance, calculated as actual minus budget? (Use a minus sign if negative.)

Answer: $2,600.00
1. $28,700 − $26,100 = $2,600.
2. Whether that's good depends on the line: spending above budget is unfavorable.
Favorable or unfavorable? par 12 s not tried yet
worked example
Actual supplies expense is $1,100 below budget. Is that variance favorable or unfavorable?
1. Favorable — spending came in lower than planned
2. Unfavorable — the budget wasn't fully used
3. Neither — expenses can't have variances
4. Unfavorable — the variance is a negative number
Answer: Favorable — spending came in lower than planned
1. For a cost, coming in below budget is favorable: less spending than planned.
2. The sign of actual minus budget isn't the verdict: for costs, above budget is unfavorable; for revenue, above budget is favorable. Then ask why it happened.
Run rate or seasonal forecast? par 16 s not tried yet
worked example
Last September's revenue was $46,000 and the business is growing about 15% a year. What is a seasonal forecast for this September?

Answer: $52,900.00
1. Compare like with like: last September × 1.15 = $46,000 × 1.15 = $52,900.
2. Multiplying one month by 12 would give a run rate, which ignores seasons, one-off jobs, and changes in customers.

rest ladder

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