Definition of Forecasting Vs. Budgeting

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Financial forecasting can give your business a glimpse into the future.
Financial forecasting can give your business a glimpse into the future. (Image: SW Productions/Brand X Pictures/Getty Images)

The challenges of running a business are extensive, and there are methods available to help you plan for your business’ financial future. The use of financial forecasts and budgets can help you determine where your business is headed and how you will achieve your financial goals. Forecasting and budgeting both provide important information, but it is necessary to determine the attributes of each in order to use them effectively.

Forecasting

Looking at the term forecasting, you may think of your local weather report. Financial forecasting does accomplish some of the same things. Using information regarding current financial conditions and expected future financial conditions, a financial forecast seeks to predict a company’s financial position, cash flows, sales and other figures in the future. Forecasts tend to morph as your company’s financial position and outside factors change.

Budgeting

Businesses plan ahead financially using budgets. Typically a business will budget over a time period of one year, allocating its revenues and expenses over the period. The goal is to insure that businesses do not spend more than they are making in sales revenue. Many times adjustments are needed and reflected in a report called “budget to actual." This shows the budgeted amount for an item in contrast to the actual amount spent. Budgets allocate money for particular purposes. They are the financial goals that companies set.

Compare and Contrast

Forecasting and budgeting are both ways of preparing for the future. However, forecasts tend to be more ethereal than budgets. Typically budgets are prepared yearly, while forecasts are prepared more frequently – usually monthly. Forecasts tend to change based on financial conditions, much like weather forecasts are subject to change. Budgets are more concrete. Once you have set a budget, you stick to it. After the budget period is over, you review where you were correct or wrong and plan your next budget accordingly. Budgets tell you what your business plan is -- what you want to accomplish. Forecasts tell you what you can accomplish given the current financial position of your company and the likely financial conditions of the near future.

Determining

Budgets and forecasts work hand in hand. If you are planning for your business’ future, there are options to help you to determine both. Software can help you build a budget and forecast for your business. You can use a variety of applicable financial ratios to help you build your budget and forecast. Online tools and calculators also can assist.

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