Budgeting vs Financial Forecasting: Key Differences

Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings. Most of the time, dividing the budget by the months of the year and obtaining an average does not correspond to reality and makes managing the budget and preventing it from being exceeded even more difficult. For instance, let’s say you’re a SaaS company that launched a new premium pricing tier. You assumed this tier would have the same conversion rate as your basic tier.

Budgeting creates a baseline to compare actual results to determine how the results vary from the expected performance. In addition, BP&F software documents how the overall plan will be followed month to month, specifies expenditures, and provides consistency across reports. Budgeting, planning and forecasting (BP&F) is a three-step strategic planning process for determining and detailing an organization’s accounting for churches long- and short-term financial goals. The process is usually managed by an organization’s finance department under the chief financial officer’s guidance. They help CFOs use historical data, industry data, and their own judgment to extrapolate financial information based on hypothetical future events. As a result, they aid decision-making by letting you better prepare for likely outcomes.

Budget example

You can create financial projections to communicate the impact of different scenarios to your partners in the business. Evaluating and selecting planning, budgeting and forecasting software is a complex task. It requires careful consideration of the software’s functionality, its value to the planning process and its ability to support planning best practices. There are also factors such as vendor reliability and support, user community connections and commitment to customer success once the sale is complete. A budget is a financial plan that outlines the expected income and expenses for a given period(usually a year). Many companies combine judgment and quantitative forecasting to determine future costs, plan the company’s direction, and predict sales and market demand.

Ultimately, a good financial plan provides a top-down operational framework to explore various scenarios. The two terms budget and forecast, ae commonly misconstrued with each other. But there exist a fine line of differences between budget and forecast, which we’ve discussed in the given article. While most budgets are created for an entire year, that is not a hard-and-fast rule.

Flexibility in Assumptions

Budgeting quantifies the expected revenues that a business wants to achieve for a future period. In contrast, financial forecasting estimates the amount of revenue or income achieved in a future period. Budget setting and financial forecasting have unique purposes, but they work best together. While a budget details expected future results, a forecast focuses on probable future events to inform whether a company will hit the targets set in a budget. To use the common analogy that the budget is a map, taken together, forecasting and budgeting are sort of like Waze or any map application on your phone. Budgeting is the map, and forecasting provides the tools to make adjustments in how you get to your destination.

For instance, you can increase profit by generating more revenue, reducing costs, or both. If your plan relies on more revenue, then you should project higher revenue in your budget. For example, you may want to increase revenue by 2.5% each quarter to meet the goal of 10% annual growth. You can adjust your forecasts to see that, at the current rate, you’ll only reach 8% growth. To achieve your original goal of 10% growth, you now need to average 2.7% growth in Q2 through Q4. There are a few different ways to achieve that — you could increase sales to your existing market, target a new market, or raise prices.

What Is Budgeting?

You may find short-duration budgets for a month based on the company’s expense management. Companies prepare the budget before implementing the plan and may adjust it to manage their operations better. A budget reveals the shape or direction of a company’s finance, while the forecast tracks whether or not the company is meeting its financial goals as outlined in the budget. Long-term financial forecasting may be done without first having a budget, but it would likely use past key indicators from previous budgets. Although budgeting and financial forecasting are often used together, distinct differences exist between the two concepts.

On the other hand, the forecast is just a prediction about future inflows and outflows of the business organization. A budget can help set expectations for what a company wants to achieve during a period of time such as quarterly or annually, and it contains estimates of cash flow, revenues and expenses, and debt reduction. When the time period is over, the budget can be compared to the actual results. For example, both short-term and long-term financial forecasts could be used to help create and update a company’s budget. A budget may not always be necessary during a fiscal year, although many companies make them.