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Difference between Budgeting vs Forecasting

The difference between budgeting vs forecasting has an important role in the business. While a forecast picturises what the company will achieve and the various factors involved and on the other, a hand budget estimates how much the money business will earn and how much money it’ll spend over a certain period. In budget report fixed and operating expenses and evaluate how to allocate the money coming into the business.

This article helps you understand the difference between Budgeting vs forecasting and help to prepare accurate budgets and forecasts as a business.

What Is Budgeting?

Budgeting refers to planning a strategy for a company’s finances over different areas. It helps estimate the company’s revenues and costs for the future period that the company wants to accomplish. Budgeting is a set format of aim and purpose that a company wants to attain in a particular time frame (yearly or more than that). But it can be distinct depending on the factors that the company will consider.

Features of budgeting are:

• Estimation of revenues and expenses
• Future cash flows
• Expected debt reduction
• A budget is compared from actual results to expected results to calculate the variances between the two figures.

When constructing the budget for companies, the budget reports may encompass input from the company’s various functional departments and Business units. That’s why preparing a budget is a time-consuming process.

The following are types of budget:-

• Incremental budgeting
• Value proposition budgeting
• Zero-based Budgeting
• Cash flow budgeting
• Activity-based budgeting
• Surplus budgeting

What is Financial Forecasting?

A forecast is a computation of feasible future events. With the help of existing or past data, forecast the future outcomes of the business to determine the company’s financial position in the upcoming years. Various factors, such as macroeconomic factors (social and political) that influence the business while preparing the forecast reports must be considered. Forecasts are done for sales, production, cost, raw-material procurement, and the business’s financial requirements. The forecast has some flexibility, whereas the budget has a fixed target.

Budgeting and forecasting are generally identical or understood as the same activity (budgeting includes forecasting). However, there is a slight difference between both. Forecasting estimates what will occur during a company’s budgeting period, including significant income and expenditures. 

Forecasting^[1] uses the top-down or bottom-up approach for both long-term and short-term periods. A long-term forecast will offer valuable results to the management for their strategic business plan. On the other hand, short-term forecasting is commonly done for operational and day-to-day business requirements.

The following are types of financial forecasting:-

• Judgmental forecasting model
• The Delphi method
• Econometric model
• Time series model

Differences between Budgeting vs forecasting

For comparing Budgeting vs forecasting. We need to differentiate between these two concepts; so, following the top differences between Budgeting vs forecasting are.

Budgeting

Forecasting

Budgeting involves being clear about what businesses want to achieve, such as their goals.      Budgets are prepared to set goals for the upcoming month, quarter, or year.   The budget is prepared only once or twice a year. That’s why budgeting is often said to be unchanged because it doesn’t frequently happen, compared with forecasting.   When the time frame of a budget is getting over, the actual results will be compared to the estimated goals to see how they differ and whether the budget is achievable or not so that company will revise the budget for the future accordingly.   Budgeting is a broader aspect, including revenues, costs, cash flows, profits, and financial position items.       Budgets include many aspects, which is why they are highly detailed for businesses. For example, prepare the budget for expenses. Budgetary aims and purposes are communicated to all levels, including the floor levels employees in manufacturing companies, to attain standard production.

Forecasting refers to estimating how the business or company will perform and in which direction the company will go.    Forecasting is done to evaluate whether or not the budgeted target will be met at a specific time.   Forecasting is done more regularly than budgeting. It is updated every month or every quarter.     Forecasting is a variance analysis technique, so analyses are not regulated for the forecasted numbers as they are primarily for short-term periods.       Forecasting is done for the short-term period. That’s why it doesn’t lead to a drastic change in the business so much. Forecasting allows the management to decide to increase the shifts of workers as per the demand change.   Forecasts are not as broad as budgets, so they are not as detailed. Forecasts are more like general overviews in comparison. Forecasted data are primarily for the management and the team of supervisors so that they will understand how to manage the work to meet the targets.

What should be considered first, a Budget or a Forecast?

A budget is usually prepared before a financial forecast. The budget shows the direction of a company’s finance. At the same time, forecasting helps track whether the company is achieving its financial goals. It would like to use past key indicators from previous budgets to do long-term financial forecasting. 

Conclusion

Budgeting vs forecasting are used interchangeably, especially in small business sectors, but they both are not similar. The budget will help manage business operating and fixed expenses. At the same time, forecasting offers a good idea of high-level business goals and objectives, and the initiative company should take to achieve them.

Both terms are essential and integral to the short-term and long-term decision-making of the business. If budgets are not prepared, the company may have no direction to follow, and on the other hand, if forecasting is not done, there can be a chance of oversight and piling up of wrong decisions and inaction.

Read Our Article: Cash Flow Forecasting in Financial Model