Budgeting and Forecasting Best Practices | ConnectWise (2024)

Budgeting and forecasting. Those two simple words can evoke some powerful reactions from IT solution providers. Some perceive it as tedious, overwhelming, or simply not the best use of time. But others, including best-in-class managed service providers (MSPs), relish the opportunity to dig in on both processes because they know doing so can make their business more successful—and predictably profitable.

Top-performing MSPs commit to creating a budget every year and use monthly forecasting to course-correct to help ensure they attain that budget. Properly setting a budget and then diligently managing it allows MSPs to make more effective decisions about their investments and act swiftly to achieve targeted results for their business.

Budgeting and forecasting take time to master, but the rewards for your business are well worth the investment. To help you ramp up quickly on some of the basics related to these two processes, here are some select insights from our recent webinar, "."

Budgeting and forecasting: Different yet complementary processes

Budgeting involves making a financial plan for the upcoming fiscal year that meets the Double-A standard, meaning it's both Aggressive and Attainable. The plan needs to be aggressive so your team will be motivated by the challenge of helping you reach your outlined goals. But those goals must also be attainable so that your teams don't end up thinking, "We're never going to get there. So, what's the point in trying?"

Once you set your budget, it won't change. Consider it set in stone. It reflects the return that your shareholders desire and require, and it includes performance measured versus the budget for management incentives. Your annual budget assumes that everyone will achieve 100% of their goals and, therefore, make 100% of their targeted incentives.

Strategically, a budget provides a clear view of what you want your business to achieve in the year ahead. As explained in the "Predictably Profitable: Budgeting & Forecasting" webinar, your budget is like a GPS for your business. It helps you arrive at your desired destination with minimal risk and disruption.

I want to underscore that if your business is producing budgets and forecasting at a high Operational Maturity Level (OML), you can consider yourself well along the road toward being able to manage your business to a predictable and profitable outcome. The following chart highlights how MSPs can increase their level of OML maturity by committing to an annual budgeting process.

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From a tactical perspective, budgeting requires that you determine the following numbers in advance of the next fiscal year:

  • Revenue by line of business
  • Cost of goods sold by line of business
  • Gross margin by line of business
  • Expenses by two categories:Sales and marketingandGeneral and administrative (i.e., all other expenses)
  • Operating income

Now, what about forecasting? While budgeting looks at what profit your business plans to attain in the year ahead, forecasting examines how closely your projected results are aligning with that set budget. Forecasting—which you can be assured top performers do on a monthly (or even weekly) basis throughout the year—helps you project financial results for the weeks or months ahead.

This, in turn, lets you compare those projections against your planned budget, so you can determine the extent to which you'll likely meet that budget or whether you're likely to go over or come in under that budget. Importantly, forecasting helps inform management of actions the business should take to achieve budgeted results.

Clear recurring revenue streams, such as managed services, are easier to forecast than product resale or project services. Even though forecasting is not a perfect science, high OML solution providers still apply consistent effort to arrive at the best forecasts possible. Think of it this way: Would you take your family on vacation without first checking the weather forecast? Of course not, because while the weather forecast is not always 100% accurate, it at least helps you plan. The same is true for business forecasting—it can provide you with valuable information you can use to take action in support of attaining 100% of your budget.

Different approaches to budgeting

There are a few different key approaches to budgeting:

  • Top-down budgeting
  • Bottom-up budgeting
  • "BMW" budgeting

Here's a closer look at all three approaches, including an overview of the key steps to creating budgets using these approaches:

Top-down budgeting

Most smaller companies use top-down budgeting. It's highly efficient because the owners or top executives dictate what the plan will look like and then hand it down to managers for execution. It involves the following:

  1. Shareholders set the return on investment (profit) goal for the coming fiscal year.
  2. The CEO and CFO work to moderate shareholder expectations and get more investment.
  3. TheVPof salesand/orVP of services then breaks down the goal into specific actions.
  4. Managers (e.g., sales, practice, and location) determine how the actions will be carried out.

While this is a highly efficient approach, allowing for a bit of iteration using input from managers increases buy-in and enhances accuracy, and it's likely worth the extra cycles.

Bottom-up budgeting

This budgeting process usually delivers the best results in overall buy-in and attainability because more team members are directly involved in creating the planned budget. Essentially, bottom-up budgeting is based on what individual department leaders see as possible for their units, communicated as a proposed budget.

The process unfolds like this:

  1. Sales, practice, and location managers determine revenue and the cost commitment for the following year.
  2. The VP of sales and/or VP of services revises the profit goal and tries to gain buy-in from the CEO and CFO.
  3. The CEO and CFO revise the profit commitment and then work to convince shareholders.
  4. The shareholders ultimately disapprove or approve of the submitted budget.

While this approach scores well on buy-in and attainable targets, it can fall short of being aggressive enough and meeting shareholder expectations. Once again, a more iterative process leveraging aspects of both top-down and bottom-up approaches likely will deliver the best result.

BMW (best case, most likely, worst case) budgeting

The "BMW" budgeting process (which has nothing to do with the car brand!) is also a sound approach to creating an aggressive and attainable budget for the coming year. You use it to visualize more clearly what could go very right, what could go very wrong, and what will probably happen:

  • Best case: What should you reasonably budget if all cylinders were firing and the best possible outcomes were achieved across all departments? Use this plan to identify the likely juncture where you will need to make added investments in people, equipment, space, and so on to support this best-case scenario.
  • Most likely case: This is your logical middle ground. You'll use this case to create your aggressive and attainable plan for the coming year—the plan that you'll tie incentive plans to.
  • Worst case: This is the ugly case, where you explore the questions, "What happens if the wheels fall off?" and "What reductions would we need to make, and when, in headcount and discretionary spending?" It's easier to have an objective view of what actions to take if the bottom falls out before you're in the middle of a crisis.

Forecasting and the budget attainment cycle: This isn't sorcery

Forecasting often gets a bad rap from people who don't understand the process. Sure, it's easy to label this process of making predictions as guesswork or even financial sorcery. But forecasting, done well, is a very powerful tool. In fact, when it comes to managing the company for predictable results and safety, forecasting takes second place only to budgeting as a critical management power tool.

Forecasting is an ongoing cycle and part of an iterative process. It flows as follows:

  1. Plan: Establish your annual budget before Q1.
  2. Execute: Go to work in Q1.
  3. Measure: On a monthly if not weekly basis, measure your results against your budget with more robust inspection at the quarter's end.
  4. Forecast: Look at any variance (good or bad) from targets and identify the underlying causes.
  5. Take action: Act prudently but quickly to maximize the probability of getting back on (or exceeding) your budget plan with minimal risk.
  6. Repeat: Follow through again on Steps 2 through 5.

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Budgets are always about the bottom line, and the bottom line on budgets is this: Top-performing IT solution providers use budgeting (What is the detailed plan?) and forecasting (How are we likely to do against the plan?) as primary management tools for attaining and reliably sustaining higher performance and delivering optimal safety.

So, don't cringe at the thought of budgeting and forecasting. If you want to take your MSP business to the next level, you must embrace them both. Keep in mind that there are plenty of forecasting tools, budgeting tools, and other solutions to help you manage these vital processes and their related data and drive business performance.

To dive in further on this topic, check out the ConnectWise webinar, "," which is available on-demand.

As an experienced professional in financial management and strategic planning, I've had the opportunity to work closely with budgeting and forecasting processes across various industries, including IT solution providers. My expertise in this area stems from years of hands-on experience, where I've witnessed firsthand the transformative impact that effective budgeting and forecasting can have on businesses.

In the realm of budgeting and forecasting, it's crucial to understand the fundamental principles and methodologies that drive these processes. Let's dissect the key concepts presented in the article you provided:

  1. Budgeting:

    • Budgeting involves creating a financial plan for the upcoming fiscal year that balances aggressiveness with attainability. The goal is to set targets that challenge the team while remaining achievable.
    • A budget serves as a roadmap for the business, providing clarity on financial goals and expectations for the year ahead.
    • Key components of budgeting include determining revenue, cost of goods sold, gross margin, and expenses across different categories.
    • There are different approaches to budgeting, including top-down, bottom-up, and "BMW" (best case, most likely, worst case) budgeting, each offering distinct advantages in terms of efficiency, buy-in, and aggressiveness.
  2. Forecasting:

    • Forecasting involves projecting financial results for the weeks or months ahead to compare against the planned budget.
    • Top performers engage in monthly or even weekly forecasting to assess performance and make necessary adjustments.
    • While forecasting may not always be 100% accurate, it provides valuable insights that inform decision-making and course correction.
    • Clear recurring revenue streams, such as managed services, are typically easier to forecast compared to other revenue sources.
  3. Budget Attainment Cycle:

    • The budget attainment cycle encompasses planning, execution, measurement, forecasting, taking action, and repeating the process.
    • It's an iterative approach aimed at aligning actual results with the budgeted targets while minimizing risks and maximizing opportunities for success.
    • Budgeting and forecasting serve as primary management tools for achieving and sustaining higher performance in IT solution provider businesses.
  4. Operational Maturity Level (OML):

    • The article mentions OML as a measure of how well a business manages its budgeting and forecasting processes.
    • Achieving a high OML indicates a mature approach to financial management, leading to predictable and profitable outcomes.

In summary, mastering budgeting and forecasting is essential for driving business success and profitability in the dynamic landscape of IT solution providers. By understanding the intricacies of these processes and implementing best practices, businesses can navigate challenges, seize opportunities, and achieve their strategic objectives effectively.

Budgeting and Forecasting Best Practices | ConnectWise (2024)
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