As an accounting and finance professional, you’re tracking a lot of things at once. It’s easy for lines to blur, but when it comes to your budget vs forecast, you don’t want to get mixed up. Learn the difference between each vital business tool.
Summary
A budget plans the organization's finances and resource allocation, while a forecast predicts future financial conditions and is consistently measured against the budget to refine business operations.
What is a budget?
Budget in business finance refers to the organization’s planned expenses, assets, and liabilities. While businesses create budgets for a set period, these estimations can be (and often are) adjusted during that time to meet actual numbers, or if unexpected circumstances are on the horizon. This helps the organization better allocate its resources to improve operations and efficiency. Budgets also help set goals, measure outcomes, and plan for contingencies.
Specific inclusions in a budget include:
- Revenue and expense estimates
- Cash flow expectations
- Debt reduction expectations
- Financial goals
What is a forecast?
A forecast calculates an organization’s future financial position based on historical data. Forecasts also consider variables like the current and expected market trends. They can be qualitive, using a professional in the field’s judgement to make predictions; quantitative, relying on statistical methods; or, most commonly, econometric, using mathematical formulas that account for many variables.
The goal of a forecast vs budget is to anticipate results based on prior financial data and inform an organization’s decision-making. Leaders trust them to be accurate, timely, clear, and relevant, which helps them decide on things like expected performance vs budget allocation, refining goals, and more.
What’s the difference: budget vs forecast?
Budgets and forecasts vary in their focus, goals, and application within an organization. In its most basic description, a budget plans an organization’s finances while a forecast predicts them. Here are the details:
Budget vs forecast | ||
| Budget | Forecast | |
| Purpose | To plan a financial roadmap, spending limits, and revenue goals | To predict financial conditions that inform budgets and their performance |
| Content | Planned sales, revenue, expenses, cash flow, spending limits and allocation, etc. | Expectations of how the budget will be met |
| Timeframe | Typically a fiscal year | Rolling updates |
| Source | Historical data, department needs, and strategic goals | Short-term trends and expectations through long-term general projections |
| One-word descriptor | Plan | Prediction |
How do budget and forecast work together?
While they’re different, budget and forecast are both necessary for business operation. A budget normally enters first, as the fixed goals of the business, planned spending and resource allocation, and planned revenue. The forecast is then consistently updated and measured against the budget to refine business operations and optimize resource allocation.
Budget and forecast: How you can learn both
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