Forecasts & Budgets
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. You're level 1. You can read and practice here now.
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
- Name the drivers: how many customers, and the price each.
- Multiply them.
- Write the assumptions down, so anyone can check them.
worked 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
- 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
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
- 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
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
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.
practice
Driver-based revenue
worked example
Forecast 69 full-month customers at $300 each. What is forecast recurring revenue?
Answer: $20,700.00
- Revenue = customers × price = 69 × $300 = $20,700.
- Building the forecast from drivers makes it checkable.
Budget versus actual
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
- $28,700 − $26,100 = $2,600.
- Whether that's good depends on the line: spending above budget is unfavorable.
Favorable or unfavorable?
worked example
Actual supplies expense is $1,100 below budget. Is that variance favorable or unfavorable?
- Favorable — spending came in lower than planned
- Unfavorable — the budget wasn't fully used
- Neither — expenses can't have variances
- Unfavorable — the variance is a negative number
Answer: Favorable — spending came in lower than planned
- For a cost, coming in below budget is favorable: less spending than planned.
- 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?
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
- Compare like with like: last September × 1.15 = $46,000 × 1.15 = $52,900.
- Multiplying one month by 12 would give a run rate, which ignores seasons, one-off jobs, and changes in customers.