Both serve their own unique purpose and are crucial to building the financial model for your business. Let’s say that by the end of last year, your revenue was increasing at a rate of 2% month-over-month (MoM), and in your last month, you made $250k in revenue. The “Actual” column stays blank until the year-end when you review performance.

The Finmark Blog is here to educate founders on key financial metrics, startup best practices, and everything else to give you the confidence to drive your business forward. If your churn is higher than expected and you’re losing more customers each month, your customer base won’t grow as quickly as you planned, which will lower your forecast numbers. Now, for some reason—lack of quality leads, an issue with your conversion rates, or something else—your customer acquisition isn’t as high as you’d expected, and you aren’t hitting your monthly goals. This is exactly why it pays to regularly check and compare your budget and forecast numbers.

Budgeting vs. Financial Forecasting: An Overview

Because an organization’s future is undefined, financial planning is a perpetual process. Despite this, a plan is more static—more of a roadmap than a document updated daily. The plan relies on historical performance data and subjective financial analysis, so it can never be fully accurate. The projection of business activities for future accounting period on the basis of historical data is known as forecast.

While budgeting and forecasting are used interchangeably, especially in small business circles, they are not the same. Your budget would help you manage business expenses, while forecasting gives you a good idea of your high-level business goals and the steps you should take to achieve them. Actual financial results are compared to budgeted amounts, and variances are analyzed.

If demand for the company’s product has changed significantly due to trade policy, quality problems, or viral popularity, then you must likely adjust sales forecasts as well. Volatility in the price of raw materials or other major cost factors can likewise lead to changes in the forecast. Finance teams typically create budgets once a year using a fairly comprehensive process. This involves collecting input from many different stakeholders, resulting in a budgeting process that usually takes somewhere between a few weeks and a few months to complete. Typically, budgeting also involves a good deal of negotiation, with expectations and commitments established between management and department heads throughout the negotiation process.

What is budgeting, planning and forecasting (BP&F)?

A company’s budget is typically re-evaluated periodically, usually once per fiscal year, depending on how management wants to update the information. Budgeting creates a baseline to compare actual results to determine how the results vary from the expected performance. Realistically, the more useful of these tools is the forecast, for it gives a short-term representation of the actual circumstances in which a business finds itself.

Forecasting, on the other hand, is the process of making predictions about future events, based on historical data, trends, and other relevant factors. The purpose of forecasting is to estimate what may happen in the future and plan accordingly. Forecasting may involve several scenarios to evaluate how different events may influence your business. Budgets and forecasts serve distinct purposes, catering to different needs within financial planning and management. The former provides a detailed plan for resource allocation, while the latter offers a forward-looking estimate of financial performance based on currently available information. Both tools are valuable for decision-making and financial control within an organization.

What’s the Difference Between Budgeting and Forecasting?

Budgeting, planning and forecasting (BP&F) is a three-step strategic planning process for determining and detailing an organization’s long- and short-term financial goals. The process is usually managed by an organization’s finance department under the chief financial officer’s guidance. It’s also important to note that budgeting and forecasting have their limitations. Budgeting can be limited by unforeseen events that may affect revenues and expenses, making it difficult to accurately predict outcomes. Forecasting can be limited by the availability and accuracy of data, as well as the assumptions and biases of those making the predictions. However, despite their limitations, budgeting and forecasting should still be considered invaluable tools.

Budget setting and financial forecasting have unique purposes, but they work best together. While a budget details expected future results, a forecast focuses on probable future events to inform whether a company will hit the targets set in a budget. To use the common analogy that the budget is a map, taken together, forecasting and budgeting are sort of like Waze or any map application on your phone. Budgeting is the map, and forecasting provides the tools to make adjustments in how you get to your destination.

In other words, budget indicates the business plans and therefore planning should be done before budgets are prepared. It is prepared by the management of the enterprise keeping in view the past experiences. After the preparation of budgets, they are used to direct and coordinate business activities to achieve the objectives. A budget helps in the control process, i.e. actual outcome is compared with the budgeted outcome, and if there is any deviation, then necessary actions are taken to prevent unplanned expenditures. 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.

What’s the difference between budgeting and forecasting?

Since budgets can take a significant amount of time and effort, I recommend starting with a forecast that guides your strategic direction. Determine the major sales and expense categories that you should pay attention to and then create forecasts for those. With a financial forecast built on real historical data, you’ll be able to measure whether or not you’re on track, but also what you can expect your future growth to look like based on your current performance. Although we frequently think of budgeting as an annual exercise, you can adjust budgets throughout the year. However, in most organizations that information remains relatively static.

However, as you prepare a detailed financial outline, you know what is achievable. Forecasting is an important tool to help a company make necessary adjustments in spending and focus during the year as the business changes. For example, if a major customer will be reducing or adding to their volume of business with your company, this will have a major impact on operations and cash flow. A forecast is a projection of what will happen at a higher level, generally key revenue items and overall expenses. Budgeting can sometimes contain goals that may not be attainable due to changing market conditions.

How businesses use forecasts

To correct it, you can explore a couple different revenue scenarios, including ones based on more conservative assumptions. This way, you’ll be able to understand what happens to your budget even if you fall short of ideal performance. There are a few different ways to achieve that — you could increase sales to your existing market, target a new market, or raise prices.

Additionally, budgeting is usually done on an annual basis, while forecasting can be done on a more frequent basis, such as monthly or quarterly. Forecasting may also involve longer time horizons, reaching several years into the future. At insightsoftware, we provide financial planning and budgeting tools that provide maximum flexibility and enable efficient collaboration. To learn more about how your organization can streamline and improve budgeting and forecasting, contact us today for a free demo. While a budget is typically short-term, financial forecasting happens both short-term and long-term, which takes more time.

Budgeting is the process to create plans or estimates using the prior period items and adjusting to upcoming requirements to create a future projection for the upcoming period. Budget is also widely known to show a roadmap to the vision of the company. Bottom-up budgeting and forecasting gathers estimates for each segment or department of a budget or forecast, then adds them up to reach the total.

Also, companies need to create multiple forecasts to have the most accurate predictions of their business conditions. A budget is a detailed financial outline of what the business thinks will happen over a period of time (often a year) financially. The budget will include details about the company’s revenues, expenses, cash flow and financial position. This information should be available from your company’s financial reports. To learn more about financial reporting and to download free customizable financial statements, see our guide here. As a small business owner, you know how important it is to plan ahead, make informed decisions, and stay on top of your finances.

BP&F software helps make it easier for finance managers to produce more accurate budgets and perform what-if scenario analysis. While budgeting and forecasting involve predicting future events, they Difference between budget and forecast have different objectives, time frames, and focuses. While a company’s plan, budget, and financial forecast are often discussed in the boardroom, these terms’ functions are not always precise.

Additionally, a long-term forecast might help a company’s management team develop its business plan. Techniques used in forecasting include trend analysis, which looks at historical data to identify patterns, and regression analysis, which uses statistical methods to estimate relationships between variables. A small business can usually manage forecasting on their own, but as your business grows, you may need to employ accounting experts or data analysts to achieve more accurate forecasts for your business. There are different types of forecasting methods that small businesses can use, such as quantitative and qualitative forecasting. Quantitative forecasting uses historical data and mathematical models to make predictions about the future. Qualitative forecasting, on the other hand, relies on expert opinions, surveys, and other non-mathematical approaches to make predictions.

• Don’t hesitate to seek the guidance of a financial professional to help you develop a comprehensive budgeting and forecasting strategy tailored to your business’ specific needs.
• The update is a key part of the process, because each period’s actual results bring insights to business performance, and reset the forecasted cash and profit figures.
• Besides revenue and expenses, things like capital expenditures and debt servicing, and even elements like strategic partners and other resources are considered.
• However, you can use the static budget as a guideline, and be flexible if business conditions change.
• 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.

Small businesses and startups that don’t have much historical data to use in forecasts can look at qualitative data such as surveys or research reports. Since forecasts are updated regularly, these initial projections aren’t set in stone. Say that in March and April you experience 3% MoM growth instead of your predicted 2%. The budget also outlines goals for operating expenses, which add up to $2.8m.