Financial professionals prepare budgeting and forecasting reports every years. Not all professionals use the same methodologies and assumptions in the preparation of the reports. There is really hard and fast rule on which methodology or assumptions are the best or most accurate. They differ from company to company and from industry to industry.

One of the most practical way to get it started is by working the sales and marketing numbers first. The rest of the cost and expenses will be forecasted in reference to past performance and sales/marketing numbers as a guide.  For example, if you forecast a twenty percent increase in net profit the following year. All cost and expenses will be tuned towards them accordingly or reduced, if a cost cut strategy is adopted.

Most of budget and forecast presentations are well impressive with fantastic key highlights, justifications and graphics. One can get convinced easily by the presenter charisma and well supported facts and figures.

Usually the extend of accuracy and reliability of the budgets and forecasts is only known after several months later. Of course, there are a lot of factors that can determine the performance of the company. A company has all the controls and abilities to make aggressive budgets and business plans happened. Also a budget and forecast cannot be too high until its become unrealistic to achieve within the stipulated periods.

Not all budgets and forecasts are achievable. You may have heard people commenting that a budget is unrealistic. But how do one determine whether it is realistic or unrealistic. There is no hard an fast rule on how to determine an unrealistic budget or forecast. However, there are certain best practices that you refer as a guide.

For example, if a company has a past historical performance of increasing its bottom line of 20% a year, it is considered acceptable or prudent if the company makes a projection of 20% increase in bottom line in its budget and forecast.

If a company always achieved its budget and forecast in the past, it also meant that their budgets and forecasts are reliable and most probably achievable.

However, if a company never or did not achieve its budgets and forecasts in the last 2 years, the reliability of its current budgets and forecasts would be suspected. In this circumstances, the budget and forecast can be termed unrealistic even it is well supported by facts and justifications. This happened to one of the companies that I have worked in before. The Chief Executive Officer (CEO) get involved in the budgeting and forecasting process and produced numbers and justifications to his whim and fancy. The external auditor commented ‘Your budget and forecast are unrealistic and will not be considered". This hit the CEO’s ego directly and hard.