Budget vs Forecast - What is the difference?
Budgeting and forecasting are used by businesses as a form of planning their finances so they know where they are spending money, where they need to spend money and ultimately where they can improve and grow. As a business owner, you would need to know the difference between these two methods of financial planning so you can plan accordingly what you want to achieve (budgeting) and what you think you will achieve (forecasting).
What is a Budget?
A budget is a quantified expectation for the upcoming financial period for what you want your business to achieve. In a budget the business owners will outline where they want the business to be by the time the financial period in question comes to an end.
Budgets might represent aspects such as a representation of the future results of the business, estimates of revenue and expenses, financial position and expected cash flow that the business wants to achieve during the financial period. The budget will be compared to results as they come, to determine how close the business is to achieving its goals and assess and manage progression.
This comparison can be useful to change the business strategy if the business is varying too far from the expected performance which was detailed in the budget. Budgets are often updated annually, although budgeting can be done at more regular intervals depending on the business or the financial period.
What is a Forecast?
On the other hand, a forecast is an estimate of what your business will achieve in the period. This is used as a prediction and is more of a strategic method of financial planning, as historical data is used to form the forecast.
Forecasts might include and be limited to aspects such as revenue and expenses; they are often less extensive than budgets.
They may also be updated a lot more often than budgets, which might be monthly or quarterly, and they are often used for more short-term financial planning in a business - although they can be used for long-term strategy as well.
Forecasts come in a range of forms for various scenarios or outcomes - this may be referred to as pro forma statements. This means the business owner can plan for the future as they can work out what is likely to happen regarding the business’ finances.
What is the difference between a budget and a forecast?
One key difference between a budget and a forecast includes how often they are updated. Whilst a budget is often updated annually and represents more long-term planning, forecasting is more helpful for the short-term and is updated much more regularly, perhaps monthly or quarterly.
Also, budgets and forecasts are functionally different. Budgets are used for the business owner to manage operations and outline where they want the business to be and what goals they want to achieve. Forecasting is a report which indicates where the business is actually going, charting growth over a particular period.
When deciding which of budgeting and forecasting is more useful for businesses, it may be forecasting as this works in the short-term to represent the circumstances the business will find itself in. Therefore, action can be taken based off of the forecast.
In turn, budgets might include targets and goals which are not achievable. Also, as they are only updated annually most of the time, it’s difficult to predict the market conditions and so by the time the financial period has ended, the budget’s predictions may be way off and the goals not achieved because the long-term planning of the budget could not take into account changes in the market and thus did not come to fruition.
However, budgeting can be very beneficial for a business and should be used alongside forecasting when a business is planning finances.
Budget vs Forecast - Should I use a budget or a forecast?
If you want to set out your business finances in terms of what you want to achieve, you should use a budget. However, if you want a more summarised financial plan which states the business’ actual expectations for results, a forecast is of more use to your business.
Businesses should use both a budget and forecast in conjunction for more accurate financial planning. A forecast can be used to display the current direction of the business whereas a budget lays out the business goals.
It is important to have an idea of what budgeting and forecasting are, the various things they can be used for in terms of financial planning as well as the key differences between budgeting and forecasting. This helps your business planning regarding what you expect to achieve as well as what you want to achieve.
You can check out the services Opayo provides on budgeting, specifically Cash Flow Budgeting here.
For more information on the various other services we provide at Opayo, view our recent blog posts. For further guidance on budgeting and forecasting for your business, get in touch with a member of our team today.