The principle of budgeting and forecasting is to use historical data and future plans to forecast the next few years performance of the company.

Sponsored links

Here I am showing how to do a simple budget using credit card company to illustrate my points.

Case Study 1

A credit card company has been issuing new credit cards from 100,00, 120,000 and 144,000 for the last three years. The job here is to make a forecast of new credit card issuance for the next year with assumption that the credit card growth rate remained constant per historical performance.

Calculate the credit card issuance historical growth rate:

Growth rate from Year 1 to Year 2 = 120,000/100,000 – 100% = 20%.

Growth rate from Year 2 to Year 3 = 144,000/120,000 = 20%.

Forecast the Year 4 credit card issuance number:

New credit card issued in Year 4 Forecast = 144,000 x 20% + 144,000 = 172,800.

Case Study 2

In case study 2 we change the assumptions as follows:

Actual new card issuance from Year 1 to Year 3 are 100,000, 120,000 and 150,000 respectively.

In this scenario assuming that there is no know financial crisis in Year 4, the forecast should be as follows:

Calculate the credit card issuance historical growth rate:

Growth rate from Year 1 to Year 2 = 120,000/100,000 – 100% = 20%.

Growth rate from Year 2 to Year 3 = 150,000/120,000 = 25%.

To forecast the Year 4 credit card issuance number, the latest growth rate should be used:

New credit card issued in Year 4 Forecast = 150,000 x 25% + 150,000 = 187,500.

Case Study 3

In case study 3, we foresee that there will be a financial crisis in Year 4 and the management decided that the new card issuance growth rate should be revised down to 10%:

Actual new card issuance from Year 1 to Year 3 are 100,000, 120,000 and 144,000 respectively.

In this scenario assuming that there is no know financial crisis in Year 4, the forecast should be as follows:

Calculate the credit card issuance historical growth rate:

Growth rate from Year 1 to Year 2 = 120,000/100,000 – 100% = 20%.

Growth rate from Year 2 to Year 3 = 144,000/120,000 = 20%.

To forecast the Year 4 credit card issuance number, the revised assumption of 10% growth rate should be used:

New credit card issued in Year 4 Forecast = 144,000 x 10% + 144,000 = 154,400.

Some budgeting and forecasting software have built-in ready built-in formulae to assist your forecasting jobs. Investing in budgeting and forecasting software is long term and will save you cost over times.