Budgeting and forecasting are two important aspects of financial management in business.
But there’s a difference between budgeting forecasting and forecasting budgets. This guide will take a more in-depth look at the differences between budgets and forecasts, and why businesses should use both.
Budgets are expectations of what a company wants to achieve for a period, typically a year. Creating a budget involves allocating resources and setting financial goals.
Characteristics of a budget include:
Budgets are compared to actual results to gauge whether a company is on track to meeting its goals.
Budgeting provides a number of benefits for businesses, including:
Proper budgeting gives businesses insight into their cash flow, financial position and goals. Budgets are generally re-evaluated once per fiscal year, depending on management’s preferences.
Depending on the business, several budgets may be created, including those for marketing, events and more.
Every business should be budgeting forecasting into its financial management process. Forecasting is the process of estimating a company’s future financial outcomes based on historical data.
Along with historical data, forecasting also involves looking at market trends and industry insights.
Forecasts help management predict future outcomes and make decisions based on this information. It can also help businesses identify opportunities and potential risks. Management will use this data to guide their decisions and take action based on that data.
Businesses can create forecasts for both the short-term and the long-term. It’s common for companies to create quarterly and annual forecasts to guide their decisions.
When forecasts are accurate, businesses can improve their:
Here is where forecasting and budgeting intersect, working together to help a business reach its goals.
Budgets are typically created first, as it helps shape the direction of the company’s finances. Forecasting helps track the company’s progress in reaching the goals outlined in its budget. Together, forecasting and budgeting can help companies reach their short-term and long-term goals.
It’s important to understand the difference between budget and forecast in business. While they are both important, each serves different purposes.
Forecasting vs budgeting has key differences, which are easy to identify. As discussed previously:
Forecasting budgets is complex. A company often outlines its budget for a year, although the budget can be revised every month or quarter as needed. Forecasts, on the other hand, can be:
Budgets are often less flexible because they determine how much capital is earmarked for certain areas of business. For example, you may budget for $1 million in marketing expenses and this is provided for the entire year.
If your costs exceed this amount, there’s a chance that the company will not have the funds to allot for further marketing.
Forecasting is more flexible because it can be revised throughout the year and adjusted as necessary. However, it’s easy to see the inherent relationship between a budget and a forecast. For example:
You can also forecast lower sales revenue and budget cuts must be made to fit into the company’s current sales figure. Forecasting cash flow will also show if there’s enough cash to cover operational expenses or if securing other forms of capital may be necessary.
Home Depot is a prime example of a company that forecasts weaknesses and cuts its initial forecasts. Shrinking profits also impact budgets, leading to minor layoffs. If revenue and profits continue to fall, it may impact budgets enough that employees start to experience larger layoffs.
Forecasting budgets allows you to align your business for success.
You'll want to align your budget and forecast to meet your strategic goals and objectives. You may need $1 million to fund a new hiring goal, but the forecast shows that if you do, you’ll need to take out a loan to keep the company running.
Forecasts can show you where you need to make budget cuts to meet goals and objectives.
Budget variances can lead to major business impacts. Companies must work to improve the accuracy of their forecasts and can do so by:
Long forecasts are less accurate than short ones because variables change over time. Frequent revisions to your forecast can help you make accurate budgets in the future.
Every business should be budgeting forecasting into its operations. An adequate budget that allows you to reach your goals depends on the forecasts that you make. Business success relies on you creating forecasts that are as accurate as possible.
If you’re a new or existing business, one of the smartest decisions that you can make is to integrate budgets and forecasts effectively.
Cash Flow Frog allows you to run cash flow forecasts in seconds, integrates into your existing accounting systems and empowers you to make smarter business decisions.
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