The difference between a budget and a forecast

For example, if you want to forecast a particular product line in your business, then you need a few years of data about that product line. Then based on that analysis, you can understand what can happen in the future. Budget implies a formal quantitative statement of income and expenditure for a certain period. It is a plan for the resources allocated for the completion of the activities, that requires to be followed, to achieve the desired end. It is not exactly same as forecast, which is a simple estimation of the future course of event or trend. There are five types of business budgeting that executives use to direct financial operations, but the right one is the one that works best for your company.

If your business is budgeting correctly, you will be able to identify issues before they become major problems (such as fraud or overcharging) as well as make dynamic budget changes in the moment. You may also need current budgets or profit-and-loss statements to acquire financing or investors. Whilst the budget is a plan for where you’d like to go, your forecast shows you where it’s actually going. Of course, instincts can be wrong, so you should only use this method when you do not have historical data for decision-making.

What’s the difference between budgeting and forecasting?

While budgeting and forecasting go hand in hand, small businesses shouldn’t get mired in the process and the terminology. Instead, if you’re running a small business, you should focus first on creating a forecast. Once you determine your sales goals and broad categories for expenses, you can dive in and add additional detail where it’s necessary. Clearly, the main difference between budgets and forecasts is their overall purpose.

It is certainly not unheard of to adjust budgets throughout the year, or to freeze spending based on tightening market conditions. You may often need to reallocate funds from one budget line to another based on shifting priorities. A yearly plan that changes on a whim would not truly be a plan because it would lack substantive meaning. Whereas budgets are about what the company wants to make happen, forecasts are about what companies believe will happen. Theoretically, these two approaches should match up (or should at least be fairly close to one another) at the time when you finalize the budget. After all, it would be imprudent for company leaders to build a plan for their future that is far out of line with their realistic view of what is likely to happen.

Step 7: Review, adjust and repeat

They typically cover the entirety of an organization’s financial activities, including all profit and loss (P&L) accounts (revenue and expenses). There are a few key differences between budgeting and financial forecasting, but smart business owners understand and use both to increase profits. Budgeting and financial forecasting should impact one another for maximum effect. Some businesses will also create detailed revenue budgets, developing detailed budgets for the sales of specific products and services.

• This type of forecasting takes less time and doesn’t require that you dive into granular detail.
• Because of the long-term nature of a financial plan, it allows for more flexibility and creativity.
• A forecast is a projection of what will happen at a higher level, generally key revenue items and overall expenses.
• The result is a view of how the business is trending so that the leaders can determine whether or not adjustments should be made to the existing budgets or plans.

You want to find a comfortable sweet spot to ensure you are keeping aside enough money to cover your needs as well as saving money. In this step, you need to list your fixed monthly expenses only that you pay on a month-to-month basis. It can be expenses like rent, mortgage payments, groceries, phone bills, car payments, and so on. Now, that you have learned about the objectives of budgeting, let’s look at how to create a budget. And in this process, the purpose of a budget is to keeps you accountable and committed to achieving your goals.

Step 2: Write down your monthly income

The main purpose of a forecast is to predict and prepare for the future, and to support your decision making. A forecast helps you identify and analyze trends, scenarios, difference between budget and forecast and risks, and to optimize your resource allocation. A forecast also helps you update and revise your budget and strategy, and to create contingency plans.