The difference Between Budget and Forecast
If you are running a business, you will be faced with a number of terms that – although they are used casually in everyday life - suddenly take on specific meanings. You need to understand these terms to get a grip on the knowledge you need – and two of the most important are budget and forecast.
The two terms are similar, it is true. Both are vital financial planning tools that assist the senior management of an organisation in their decision-making process – but they don’t mean quite the same thing.
What is a budget?
In a business, a budget is a formal quantitative blueprint of expenditure for a certain period. It is a way to plan for the resources required for the completion of the key business activities – usually how the business will operate profitably. It should be solidly based on past experiences, and by an understanding of the prevailing market conditions.
It is, therefore, a plan of the money required by the business to make money.
It is part of a long- to mid-term business strategy, and can be defined as the detailed financial plan for a particular accounting year.
Your budget should be prepared for the coming period, after carefully considering the various objectives of the business - vision, mission, goals, objectives - and the strategies required to meet them.
It will normally take the form of a written document which will include all the monetary aspects of a business organization. However, although it may be a sound business practice to write up a budget document – perhaps with the help of your team – at the beginning of your financial year as part of your management objectives planning, your budget must be a dynamic and ongoing process. It will need to be monitored carefully, and revised, adjusted and updated at regular intervals when there is a change in the market. If the actual outcome is compared with the budgeted outcome, and if there is any deviation detected, you will need to take action to get business back on track and to avoid unplanned costs.
In other words:
- Budgets are prepared by the management team after the enterprise planning is done
- After a budget is prepared, it should be used to direct and coordinate business activities to achieve the objectives
- A budget is the foundation of the management control process.
Different kinds of budget
There could be a master budget within a business, but this can be broken down into a Fixed Budget and Flexible (or Contingency) Budget, and there should also be a Sales Budget, Production Budget, Purchase Budget, Cash Budget and any other subcategory required by the business.
What is a forecast?
A forecast is less concrete than a budget, but it still forms a necessary part of the business management process. It is the projection of business activities for a future accounting period based on the basis of historical data. Business forecasts predict the forthcoming financial inflows and their sources by evaluating current and previous data and trend analysis. The management team will compile them in light of past experiences and knowledge of future developments, and insights into the potential.
In a nutshell, a forecast is an estimation of future trends and outcomes, based on the past and present data.
It is still a financial document, but its focus is on an estimation of the upcoming events or trends in business, on the basis of the current business conditions. It is an estimation of future business trends and outcomes based on historical data.
It is a statement of what the business wants to achieve in the current market, as opposed to a quantified account of what business will achieve under current conditions.
In other words:
- Forecasting helps the business planning by examining and analyzing current data
- It can be done by adopting qualitative or quantitative analysis or a combination of the two
- It also supports the budgeting and planning process.
The Key Differences Between Budget and Forecast
So, a budget is a financial plan prepared by the business as the foundation of its future activities. The forecast is a prediction about future conditions, and aims to identify potential and new opportunities, as well as the business-as-usual scenarios.
Budgets usually set targets for the future which need to be met for the business to stay on track. Forecasts only aim to project future outcomes but do aim to not set any target.
Using the knowledge from the Budget and Forecast
A business that accurately compiles a forecast that identities opportunities or threats - and which can codify the financial impact of those opportunities or threats in a budget - may be able to identify the business case for a loan.
At Rangewell, we are experts in business funding of all kinds, and can work with you to find the most cost-effective way to provide the funds you need to achieve your goals. We know that a well-researched forecast and a professional budget can be useful tools in helping a prospective lender to see how your business will use the additional funds to generate an additional profit.
To find out more about working in partnership with Rangewell to find better answers to your budget and forecast needs call us on 020 3637 4150 - or email [email protected] Our service is free.