Virtually every company develops its annual budgets. The budgets are compiled before the beginning of the financial year of a company. In some cases, there can be an update to the budget (a new forecast) right before the start of the year if the circumstances change. This forecast will be based on 0 actual months and 12 forecasted month, so it will be called, conventionally, a 0+12 forecast. In many cases, there is no such forecast made, so the budget is also a 0+12 forecast.
In the course of the year, companies monitor their performance against their budgets. They see if things change and revise their forecasts for the rest of the year. Every new forecast, together with the actual year-to-date result, becomes a kind of a new budget. Under the same convention, if this forecast is based on 1 month’s actual and 11 months’ forecast, it will be referred to as a 1+11 forecast. Later there will be 2+10, 3+9, 6+6, 9+3, etc. forecasts.
According to a survey by CIMA, 84% of companies perform monthly or quarterly re-forecasting, with 53% of respondents stating a desire to reforecast more frequently.
Re-forecasting serves as an early warning tool for the profit change on an annual basis. It is therefore important for any company to have a proper on-going budgeting process in place.
1. Understanding the current situation
2. Evaluating if the new forecast is reasonable
3. Assessing the accuracy of prior forecasts
This publication contains a set of methods, techniques, and visual tools that will help with the above if you either do in-house budgeting or monitor private equity portfolio companies.
As a bonus tip, the file includes very detailed step-by-step instructions on creating the most complex charts (with interim examples).