Finance Budget vs Forecast
Budgeting and financial forecasts are tools used by businesses to establish plans on how
to progress and grow the business. It helps to identify where you want to take your
business and to ensure you are heading in the right direction. Finance budget and
forecasts are used hand in hand, but there are differences between the two. Budget
identifies expected revenue that the business wants to achieve, while forecast estimates
how much the business is likely to make for the same period.
The finance budget is the outline of expectation on what a company is hoping to achieve
for a set period, which is usually twelve months. This includes estimating revenue,
expenses, cash flow and debt reduction. Budgets are compared to results, calculating the
differences between the two amounts.
A budget represents a businesses financial position, their cash flow and goals. A business
budget is re-evaluated regularly, creating a baseline to actual results and helping
management determine how the results differ from the businesses expected performance.
Most budgets are created for a year period, but in most companies, management must
allow the budget to be adjusted throughout the year as conditions change.
Financial forecasts are an estimate on a businesses future financial outcome, using
historical data to determine the future. This shows the management teams what to
anticipate compared to the previous data collected.
Financial forecasting is used to
determine how the budget should be allocated, it is regularly updated and can be used for
long and short term planning. Forecasting enables management to take immediate action
and helps management make adjustments as needed to inventory and production.
Differences Between Financial Budget and Forecast
There are some significant differences between a financial budget and forecast. Budgets
are created to meet a goal, while financial forecasts are used to identify if the budget will
be met during the same period.
The content of the financial budget and forecast are also different with the budget having
specific goals, such as how many items need to be sold or how much money must be
earned, while the forecast shows how the budget will be met.
Budgets are created for a set period of time, based on past trends and experiences.
Financial forecasts, on the other hand, examines the businesses financial situation right
now and uses that information to forecast on whether they are able to meet the budget or
not. Financial forecasting is done on a regular basis, while a budget is done for a period of
A budget identifies the direction the business wants to take, while the forecast is a report
that shows whether the company is able to reach their goals and where they will be
heading moving forward.
It is possible that the budget has goals which cannot be met due to changing market
conditions. Companies that use budgets to make decisions, should be flexible and ensure
that their budget is updated regularly, not only once a year.
Finance budgeting and forecasting should go hand in hand. The forecast should offer long
and short term financial forecasts which can help to create and update the budget.
Financial forecasts are relevant as it provides relevant information needed for action, while
the budget doesn't have to be carried out as often. In fact budgets are not always needed
during a fiscal year, even though companies do make them.
Finance Budget or Forecast – Which Comes First?
Typically a business will create their finance budget before they complete their financial
forecast. The budget will reveal the direction of the companys finance, while the forecast
identifies if the company is meeting their financial goals, which are outlined in the budget.
Long term finance forecasts can be completed without the budget, using key indicators
from previous budgets.