{Detailed analysis} What is the difference between a budget and a forecast?

 

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Difference between a budget and a forecast?



 
Essentially, a budget is a quantified expectation for what a company wants to achieve. Its characteristics are:

The budget is a detailed representation of the future results, financial condition and cash flows that management wants the company to achieve over a period of time.

The budget can only be updated once a year, depending on how often senior management wants to revise the information.



The budget is compared with actual results to determine deviations from expected results.


Management is taking corrective action to restore actual results on a budget basis.


The budget at the actual comparison can trigger changes in pay based on the return paid to employees.


Conversely, a forecast is an estimate of what will actually be achieved. Its characteristics are:

Forecasts are generally limited to the main headings of income and expenditure. There is generally no forecast of financial condition, although cash flow can be expected.


The forecast is updated at regular intervals, possibly monthly or quarterly.


Forecasts can be used for short-term operational considerations, such as adjustments in staffing, inventory levels and production plan.


There is no analysis of variance that compares forecasts to actual results.


Changes in forecasts do not impact compensation based on employee performance.


So the main difference between a budget and a forecast is that the budget is a plan for where a company wants to go, while a forecast is the indication of where it actually is going.

Also Read:
5 Types of Budgets for Businesses|Explain the different types of budgets in detail

Realistically, the most useful of these tools is forecasting because it provides a short-term representation of the actual circumstances in which a business is located. The information in a forecast can be used to take immediate action. A budget, on the other hand, can contain objectives that simply are not achievable, or for which the circumstances of the market have changed so much that it is not wise to attempt to do so. If a budget is to be used, it should at least be updated more than once a year, so it has some relationship with the realities of the current market. The last point is of particular importance in a rapidly changing market, where the assumptions used to create a budget can be made obsolete within a few months.



In short, a company always needs a forecast to reveal its current direction, while the use of a budget is not always necessary.


There are actually four types of business planning :


    Budgeting
    Forecast
    Rolling Forecast
    Targets

Detailed Analysis of Difference between budget and forecast



 Budgeting is traditionally a fixed exercise and is the result of a detailed planning exercise undertaken by the company. It often takes a number of months to complete and be done after the revision of the strategic plans. It will include detailed manpower, operating expenses, revenues, marketing, capital expenditures and plant planning. Planning is usually done at the cost center level and then combined (or consolidated) with a general version of the plan. A budget should be a financial representation of the overall plans for the company. It should not ba target, but a realistic statement of what the organization is planning.

Rolling forecasts and forecasts are similar to budgets, but are generally performed at a less detailed (detailed) level. They also need to show where the company goes according to the current operating plans and strategy. The main difference between a forecast and a rolling forecast is that a forecast generally continues until the end of a fixed financial year, while a rolling forecast comes out today for a defined number Of periods (often 15 months).

Targets should be what the company wants to achieve. They should be stretched, their should be plans for how to get there, they should be used to set bonuses and goals. Importantly, they should not represent the current situation. Ideally, therefore, a forecast will approach the target over time.


|--Budget------Forecast------Actual--|

So, forecasting is what happens after the budget is set, but before you know the actual results. In a way, forecasting is like a continuously revised budget for the remaining portion of the year ("continuous" typically being monthly, right after the books are closed and you can look back at actuals to see where things have been trending). Once time passes, you know the result and that is your "actual".

Things change throughout the year, so forecasting helps a business adapt and reallocate resources as new information becomes available, or new events take shape. However, it's still important feedback for the business to see what the budget (often called "plan") was at the start, so the budgeting process can improve for the next year (or however long the budget cycle is).
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