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Budgeting and forecasting are financial tools that businesses use to plan for growth, and as such, it’s vital for your accounting team to have a solid grasp of both. In a nutshell, budgets reflect what you want to happen, while forecasts reflect what you think will happen. Need a little more information? Get a little more information about the most significant forecast and budget differences for Australian businesses with our simple guide.
What is a budget?
Put simply, a budget is an outline of your company’s expectations for the upcoming financial period, usually one year. It’s essentially a summary of your goals, summing up where you want your company to be by the end of the given period. Budgets have a variety of features, including estimates of your revenue and expenses, expected debt reduction, and expected cash flows.
You will compare your business’s budget to actual results to determine the extent to which you’re varying from expected performance. Management may use this comparison to tweak your strategy and remediate any potential issues. Budgets are relatively static and may only be updated on an annual basis, although in some cases, budgeting is performed at more regular intervals.
What is a forecast?
A forecast is an estimate or prediction of what your business will actually achieve. Forecasts tend to be more strategic than budgets, providing you with a roadmap of where your business is expected to go that’s based on historical data and business drivers. Generally, it’s restricted to revenue and expenses, and unlike budgets, forecasts are updated regularly (i.e. monthly or quarterly).
While forecasting is often used for short-term planning (when you’re first starting out, you may even complete weekly forecasts), it can also be used over longer periods to help guide your company’s long-term strategic goals. Forecasts tend not to go into granular detail, but instead provide a high-level overview of where your business is expected to be in the coming months and years.
In order to get the most out of your forecasting, you should create a range of forecasts for different scenarios or outcomes (sometimes referred to as pro forma statements). That way, you can work out what is likely to happen to your business’s finances if certain economic conditions are met, which can help you plan more effectively for the future.
Key differences between budgeting and forecasting
Now that you have a better understanding of budgeting and forecasting, let’s explore some of the key forecast and budget differences.
Clearly, the main difference between budgets and forecasts is their overall purpose. Whereas budgets are intended to be an outline of the direction that management wants to take your business, forecasts are reports that provide a clearer indication of where the business is actually heading and whether it’s reaching its budgetary goals and ambitions. In other words, forecasts are strategic tools for charting growth over a multi-year period, while budgets are tactical tools for managing operations.
Getting budgeting and forecasting right
Overall, forecasting is a more useful tool to use for your business, as it provides you with a more insightful understanding of the actual circumstances that your business is facing. Whereas forecasts can be used to spur immediate action, budgets often provide unachievable targets or goals that simply bear no relation to current market conditions. However, it’s also important not to discount the potential benefits of a budget. Ultimately, budgeting and forecasting go hand in hand, and can be used in tandem to optimize your company’s long-term strategy.
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