What is the difference between Budgeting and Forecasting

What is the difference between Budgeting and Forecasting?

Realistically, the more useful of these tools is the forecast, for it gives a short-term representative of the actual circumstances in which a business finds itself. The information is a forecast can be useful to take immediate action.

A budget, on the other hand, may contain targets that are simply not achievable, or for the which market circumstances have changed so much that it is not wise to attempt to achieve. If a budget is to be used, it should at least be updated more frequently than once a year, so that it bears some relationship to current market realities.

Budgeting and forecasting are complementary, but they are not the same and they do not have the same value. We already know that budgeting is figuring out how much money your company will need to spend in order to achieve its desired business results. Forecasting on the other hand, is about proactively analyzing the budget and using both historical and real-time data to predict what those business results will look like in the future.

The last point is of particular importance in a rapidly changing market, where the assumptions used to create a budget may be rendered obsolete within a few months.

In short, a business always needs a forecast to reveal its current direction, while the use of a budget is not always necessary.

The Benefits of Forecasting

  • When done efficiently and with reliable data, forecasting gives you the insight you need to reallocate resources proactively and help managers make the data-driven business decisions. 
  • Forecasting will reveal business trends that help you determine if you need to adjust course.
  • It will be easier to manage your cash flow and capital requirement if you have a well-informed prediction on where the future expenses are likely to fluctuate.
  • Forecasting allows owners to focus their attention where it is needed the most.  Especially in the short-term.

How to Generate a Forecast

  • We will gather your latest actuals and input them into the forecasting model.
  • Determine an accurate time frame for your company’s forecast.
  • Calculate trends based on your historical and year-to-date actuals.
  • Apply those trend calculations to your real-time numbers to come up with forecasted results.

Periodic forecasts are beneficial, but usually only project out to the end of the current fiscal year.  Rolling forecasts, on the other hand, are even more useful because they extend beyond that timeline.

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