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Budgeting vs. Forecasting

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Last editedJun 20213 min read

Budgeting and forecasting are essential tools for any business – it’s vital to always have one eye on the future and precisely how to get there. Budgeting and forecasting are very similar, but they’re not the same.

What’s the difference between budgeting and forecasting

The difference between budgeting and forecasting is – in the simplest sense – realism. A forecast is what will most probably happen, while a budget is what you would like to see occur.

What is budgeting?

Budgeting outlines the financial position that your business wants to reach at some point in the future. Budgeting is usually done to plan for the financial year ahead, but long-term budgeting can also help create a vision for the company over the next few years. A budget will cover the following topics:

  • Sales

  • Cash flow

  • Debt reduction

Budgets should be re-visited once a year, at the very least. You should always refer back to your previous budget to see if you have met your expectations or not. If a budget has been successful, it can inform your next steps in other areas of the  business, i.e., talent management. If your budget has not been met, then you may want to consider the opposite. For example, downsizing operations until you are back on track.

Budgeting tips for your business

Here are some budgeting tips to ensure you are creating a realistic view of your business:

  • Stay flexible: You never know what might change, and your budget should reflect this.

  • Communicate: Don’t assume the state of a department. Instead, talk to the team to find out what’s really going on.

  • Start early: Budgeting can take time, and rushing the process can cause you to end up with unrealistic numbers.

  • Get a second opinion: As much as you may trust your managers, their view of the team may not be the most accurate. Make sure all your budgeting suggestions are backed up by multiple members of the team.

  • Be realistic: Make sure your budgeting is realistic and accurately reflects your business’s capabilities.

Types of budgeting

There are several types of budgeting methods your company can use:

  • Incremental: This is when you take actual figures from the past year and add/subtract the required percentage to reach the current year’s budget.

  • Activity-based: This is when activities that incur costs are recorded and researched.

  • Value proposition: This method ensures everything you have budgeted adds value to the business.

  • Zero-based budgeting: Assumes that all budgets are zero, rebuilding from scratch and closely scrutinizing every proposed cost. It’s one of the most extensive and time-consuming methods.

If you’re a small business, zero-based budgeting is where you’ll have to start. As you grow you can consider other methods. There are plenty of digital budgeting tools you can turn to, i.e., business apps that take your figures and create charts and predictions to guide your budget. That said, if you are tight on funds, adding budgeting tools to your expenses may be an unnecessary cost and they certainly aren’t imperative to drawing up a solid budgeting plan.

What is forecasting?

Forecasting is based on what your company is, realistically, going to achieve. These figures are based on your historical performance and include the following:

  • Budget allocation

  • Business plan adjustments

  • Sales

  • Expenses

  • Cash flow

A forecast is usually for a single financial year, but it can span several years. Your business may want to have more than one forecast, including a “best case scenario,” “worst case scenario,” and “neutral” option, so you won’t be caught out if things start to go better or worse than planned.

A forecast, just like a budget, should be updated regularly, i.e., monthly. The forecast can be used to guide your next steps. For example, if you want to add new starters, can your forecasted figures justify the expense?

Do I need a budget and a forecast?

No, a business does not need to have both a budget and a forecast. For a small business, forecasting alone is sufficient. A forecast is the most useful of the two as it’s rooted in actual figures and is updated regularly. A budget can be a useful tool for sharing your vision and action plan with the team, but in terms of hard figures, the forecast is where you want to look.

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