Budgeting and Forecasting: What's the Difference?

BY Eddy Hood In cfo services On May 20, 2019 With 0 Comments

Businesses come in many shapes and sizes. There are small businesses that make giant mansions and big businesses that manufacture microscopic cells. The one factor that all businesses share in common is their singular reliance and focus on making a profit. After all, businesses cannot survive without money flowing through their accounts much like humans can’t live without blood flowing through their veins (zombies being the only exception).

zombiesSimilar to the human cardiovascular system and how exactly zombies work, the flow of cash through businesses can be quite complex. After all, the complexity and necessity of financial planning is the reason for an entire industry full of businesses like ourselves to exist. Most successful financial plans involve a handful of key aspects. Two of the key factors for ensuring a steady, uninterrupted flow of cash pumps through your business are budgeting and forecasting.

Budgeting and forecasting play similar yet distinct roles in financial planning. Let’s go over the basics.

What is Budgeting?

Budgeting is the process of laying out a specific and often itemized plan for how a company will spend their resources. Typically, budgets cover expected expenditures for the coming year or quarter. Budgets are essentially guidelines for how the company should utilize its resources. Once the allocated period of time has elapsed, budgets are compared to the actual fiscal results of that time period. This comparison is called a budget vs. actual report which is used as the basis for modifying future budgets or business operations to bring budgets and actual results in line with each other.

What is Forecasting?

Unlike budgets, forecasts are not prescriptive. Forecasting is the process of analyzing past data and current trends to make predictions for how the business will perform in the near future. Forecasts take into account how operations went during the same period of time in years past to make educated guesses on how well upcoming operations will go. Forecasting relies on data analysis as well as market trend analysis. Changes that will impact the outcome of financial operations should be incorporated into forecasts on a fairly regular basis to ensure the forecast remains as relevant and accurate as possible. Forecasts aren’t used as comparisons to performance like budgets are. This means forecasts should remain fluid while taking recent events into consideration to provide insight into the company’s expected position in the near future.

How do Budgeting and Forecasting Work Together?

budgeting-and-forecastingForecasting is the process of analyzing available data to make informed decisions regarding expected outcomes. Budgeting is the process of creating realistic financial goals with itemized cash in and cash out expectations for operations. This means the information gleaned from forecast analysis can be used to inform budgeting decisions.

Conversely, past budget vs. actual analyses can be used to inform forecast expectations. In other words, budgets and forecasts work hand-in-hand to increase the accuracy and value of one another. It’s a beautiful, symbiotic relationship just like the brain viruses that cause zombieism.

At Ignite Spot, we bring to bear the nerdy power of data analysis with the equally nerdy power of financial know-how and a sprinkling of prestidigitation to help your business achieve its goals. If you need some help with bookkeeping, accounting, or taxes, we’re the team for you. If you would like some more hands-on help with budget forecasting, our Virtual CFO Services can build a custom financial plan unique to your business that will keep you headed in the right direction.

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My name is Eddy Hood. I've coached over 500 businesses on how to become more profitable. I'm the Founder & CEO of Ignite Spot, and I have mad parallel parking skills.

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