Recently, Key Business Solutions has been hearing a lot of chatter around the differences, strengths and weaknesses of budgeting and forecasting as two separate processes. We’ve seen the following perspective grow in popularity: forecasting might be more effective to planning for modern business than traditional budgeting. We’re committed to staying on the cutting edge and intersection of technology and today’s business, as the evolutions change the landscape for professionals and the organizations they are taking into the future, so moving away from the established method of achieving planning goals sparks our interest. Therefore, in this article, we’ll compare budgeting and forecasting processes with the hope that you can understand which process is more effective and productive for your company.
When you first encounter the term, forecasting, you might assume it is just a synonym for budgeting. However, budgets and forecasts are two different ways to plan, and differentiating between two is probably a good place to start. A budget is a complete, detailed aggregation of how management foresees the performance level of the business, regarding results, cash flows, and financial positioning for a particular time period, typically a year. Budgeting usually happens once a year and results in a set strategy, not usually updated more than annually, depending how often management wants to revisit the data. Budget contributors compare actual results to projected figures, so they can pinpoint any variances in performance and put together the next year’s plan. Depending on how the fiscal year unfolds, managers might tweak the strategy and the execution to get back on track in terms of actual results. The projections to actuals comparison can translate to changes to performance-based compensation for team members.
On the other hand, forecasting estimates what will actually be achieved by your organization. A forecast usually focuses on just major revenue and expense line items, not typically including financial position, but cash flows might be identified. Forecasting involves regular updates, whether you choose to do so monthly or quarterly. You can use forecasting for short-term operational adjustments and considerations, like inventory, production plans, sales performance and/or staffing. A forecast doesn’t usually involve an evaluation of variances between what was predicted and the actual results, but can be utilized to plan how to allocate your budgets for a future period. One other way forecasting distinguishes itself from budgeting is that any alterations in forecasting doesn’t impact performance-based compensation for staff.
In other words, budgeting plans for where a company would like to go, in terms of intention and destination, while forecasting illustrates where a business is actually going. The timelines also differ in ways that affect how you intersect with the processes. A forecast is updated routinely and often compared to a budget, which usually occurs once a year. Due to the frequency that forecasting evaluates the state of the business, you can use the data to take action immediately, as needed. Also, budgeting may consist of objectives that are hard, if not impossible to achieve, particularly as the marketplace changes all the time and can take a business in a different direction. Depending on the industry you’re working in and how quickly it evolves, your budget can become irrelevant rapidly.
To continue learning more about budgeting versus forecasting, read the rest of this article here.