Michael Kozak, Executive Vice President and Chief Credit Officer
David Mottet, First Vice President—Commercial Lending
Preparing the annual company budget can lead to a shared leap of faith. After all, a budget is often the result of much time and effort, as numerous stakeholders peer into the future to forecast sales and expenses based on educated guesses about market and business conditions. From there decisions are made throughout the year, including how much financing may be needed. Then, expenses are trimmed to stay in line with the budgeted numbers, and success is defined by how well the firm tracked its forecasts.
It’s a common practice, and it can be effective, but it’s not necessarily a best practice for every company.
A Better Way?
More companies and entrepreneurs are leveraging technology to create “living” budgets instead. These rolling forecasts deliver updated projections throughout the year—typically at least quarterly—to incorporate market changes, as well as variations in revenue and expense trends.
By aligning a firm’s time horizon with its business cycle, rolling forecasts can link business drivers—event-driven updates—to budget targets. This lets decision makers manage with improved responsiveness and agility, since they can make adjustments for current conditions.
Why Your Lender Cares
Because the current business environment moves faster and is more reactive than traditional budgeting approaches allow for, rolling forecasts can result in a more adaptive budget since they provide more than a best guess at a single point in time.
Rolling forecasts can also help with loan requests for a very simple reason: Banks prefer not to lend companies less than needed or more than is required. In other words, the more accurate the budget forecast, the more realistic the analysis and verification of your financing needs will be.
Also, bankers appreciate any improvement in accuracy when making credit decisions. Rolling forecasts are especially helpful where growing companies are involved. These companies are especially challenged when it comes to projecting future needs, since they will differ significantly from the past.
To discuss how improving budget forecasts could benefit your business and potentially improve the efficiency of your firm’s use of credit, contact your Old Second banker by clicking here.