What are the Differences Between Budgeting and Forecasting?
For businesses, it’s critical to have an accurate budget and an accurate forecast. This is especially true of small businesses where an oversight can leave a business owner strapped for cash, or worse having to let an employee go.
Are you scratching your head right now? If you have always thought of your business budget and your business forecast as one in the same, you’re not alone. Forecasts and budgets are two different, yet equally important financial animals, and this article will help you make sense of them both, finally understanding the difference between budgeting and forecasting.
Business Budgets 101
A budget sums up a businesses goals for the upcoming year. Think of it as a plan of action over a certain amount of time. In a budget, costs and revenue are input into a spreadsheet.
When it comes to creating a budget, remember that a budget should:
- Consider the expected demand for products and services.
- Take a company’s highest priorities and arrange the appropriate resources to cover those priorities.
- Show potential problems early enough that a company can take action.
- Have a baseline to show against the actual results.
Different types of budgets include:
- Sales Budget
- Production Budget
- Marketing Budget
- Project Budget
The Business Financial Forecast, Demystified
Forecasts are more abstract in the sense that they are working from historical data to project or predict what might happen in the future. They also look at current and future possibilities as a way of safeguarding a business.
Like we mentioned above, a budget uses these predictions in order to fiscally prepare should they happen. Following a budget is an obligation for a small business, while they are not obligated to follow a forecast. People divide forecasting into two different types:
- Judgment Forecasting—Judgment forecasting utilizes only your intuition and experience to surmise on what might happen in the near future. It is best used when there is no historical data to work from like for new product launches.
- Quantitative Forecasting—This type of forecasting uses large amounts of data to derive the most likely situations that a small business might face. It relies of repeated patterns in order to come its conclusions.
Using both Judgment Forecasting and Quantitative Forecasting allows a small business to get the most accurate take on what the fiscal year might bring.
To sum it up, after a small business has created their forecast they can then apply that information to the budget. So, as you can see, budgeting and forecasting works together, but really are two different things!
Still have questions about budgeting and forecasting? Let’s start the conversation in the comments.
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