How to Build a Financial Forecast in QuickBooks Online
Running a business often means making decisions before you have all the answers.
Can you afford to hire another employee? Will there be enough money available for HST, payroll and supplier payments? Is a new piece of equipment realistic this fall, or would it leave the business short during a slower month?
You cannot predict every unexpected expense, but a financial forecast can help you see what may be coming down the pipes. Instead of waiting for the bank balance to become a problem, you can review your expected income and expenses in advance and make changes while you still have options.
QuickBooks Online has built-in budgeting and forecasting features that can help. The features available to you depend on your QuickBooks subscription.
What Is the Difference Between a Budget and a Forecast?
A budget is the financial plan you set for a specific period. It outlines how much revenue you expect to earn and how much you intend to spend.
A forecast is an updated projection of what is likely to happen based on your actual results, historical patterns and any changes you expect in the business.
For example, your annual budget may assume that sales will be $20,000 every month. By September, you may know that sales are trending closer to $17,000 and that insurance costs have increased. A forecast allows you to update your expectations using the information you have now.
In simple terms, a budget shows what you planned. A forecast shows where you may actually be heading.
QuickBooks Online Plus and Advanced include budgeting. QuickBooks Online Advanced also includes a dedicated forecasting feature that can build projections using your historical financial data.
How to Create a Forecast in QuickBooks Online Advanced
Before creating a forecast, make sure your bookkeeping is current and your transactions are categorized correctly. QuickBooks will use the financial information already in your account, so missing or inaccurate records will produce a less useful forecast.
To create a forecast:
Go to Reports.
Select Financial planning.
Select Forecasts.
Select Create forecast.
Choose the period you want to forecast.
Choose the information you want QuickBooks to use. Depending on the options available in your account, you can base the forecast on an average of actual results, the previous fiscal year or an existing budget.
If you use the average of actual results, choose the historical period QuickBooks should use to calculate that average.
Add rules for expected increases or decreases, if needed.
Select Next.
Review the forecast name and the monthly amounts.
Adjust individual accounts for changes you already know are coming.
Select Save and close.
Do not treat the automatically generated numbers as the finished forecast. QuickBooks can identify historical patterns, but it does not know that you are planning a large purchase, losing a contract, changing your prices or hiring an employee unless you adjust the forecast accordingly.
Each time you review the forecast, refresh it with the latest actual results and update any assumptions that have changed.
How to Run a Forecast Report (QBO Advanced)
Once your forecast has been created, QuickBooks Online Advanced can generate reports that help you monitor it.
Go to Reports, select Financial planning, and then select Forecasts. Find the forecast you want to review and choose one of the following options:
Forecast Overview summarizes the forecast by account.
Forecast vs. Actuals compares your projected amounts with your actual results and shows the difference between them.
The Forecast vs. Actuals report is especially useful because it shows where the business is performing differently than expected. Revenue may be lower than projected, one expense category may be rising faster than anticipated or a planned cost may not have occurred yet.
The variance is not automatically good or bad. It is a prompt to investigate what changed and decide whether your forecast or your business decisions need to be adjusted.
How to Create a Budget in QuickBooks Online (Plus)
If your QuickBooks Online plan includes budgeting but not the dedicated forecasting feature, you can still create a useful financial plan.
To create a budget:
Go to Reports.
Select Financial planning.
Select Budgets.
Select Create budget or Create new.
Choose a Profit and Loss or Balance Sheet budget.
Select the fiscal year.
Choose whether the budget will be consolidated or divided by a category such as class or location, if those features are used in your QuickBooks account.
Select Next.
Enter your expected income and expenses by month, quarter or year.
Use historical results as a reference where appropriate, then adjust the amounts for known changes.
Name the budget and select Save and close.
After saving it, run the Budgets vs. Actuals report regularly. This report compares what you planned with what actually happened, helping you identify problems and opportunities before the year is over.
How Business Owners Can Use These Reports
A forecast or budget should support real business decisions. It should not be created once and then forgotten.
Review it at least monthly and ask:
Are sales meeting expectations?
Are customers taking longer to pay?
Have wages, materials, insurance or software costs increased?
Are there large annual or seasonal payments coming up?
Can the business comfortably afford a planned purchase?
Do prices or spending need to be adjusted?
Will enough cash be available for payroll, supplier bills and tax payments?
If your forecast shows a possible shortage, you may have time to follow up on overdue invoices, delay a non-essential purchase, reduce unnecessary spending, adjust payment timing or speak with a lender before the situation becomes urgent.
If the results are stronger than expected, you can decide whether the extra funds should remain in the business, be used to reduce debt or be invested in growth.
A Forecast Is Not the Same as Your Profit & Loss
One of the most important limitations is that a Profit and Loss budget or forecast does not automatically represent every movement of cash.
Your business may need cash for items that do not appear as ordinary expenses on the Profit and Loss report, including:
GST/HST payments
Payroll source deduction remittances
Loan principal payments
Credit card payments
Owner draws or shareholder withdrawals
Equipment and other asset purchases
Corporate or personal income tax instalments
Accounts receivable also require careful attention. A forecast may show revenue in a particular month, but that does not guarantee the customer will pay during that month.
For a practical 90-day cash flow review, start with your QuickBooks budget or forecast and then list these additional cash commitments separately. Include expected customer payment dates, payroll dates, government remittances, loan payments, supplier bills and planned purchases.
This additional step turns a financial projection into a more realistic picture of the money that may actually be available.
Better Books Create Better Forecasts
A forecast is only as reliable as the bookkeeping behind it. If transactions are missing, expenses are categorized incorrectly or accounts have not been reconciled, the historical information used to build the forecast may be misleading.
Current bookkeeping gives you a stronger starting point. Regularly comparing your forecast with actual results then helps you update your expectations and make better decisions throughout the year.
You may not be able to predict every surprise, but you can give your business more time to prepare for the expenses and slower periods you can already see coming.
Need help getting your books current or turning your QuickBooks reports into useful information? Simcoe Office Solutions can help you understand your numbers and plan ahead with greater confidence.
Comments