Budgeting vs Forecasting

Difference Between Budgeting and Forecasting

Budgeting refers to the process of projecting the revenues and costs of the company for the future specific period of time that business wants to achieve, whereas, forecasting refers to the estimate of what actually will be achieved by the company.

Budgeting is a structured format of goals and objectives that a company wants to achieve in the selected time frame most commonly a year; however, it can be different too. Forecasting is a periodic observation of the proportion of budgeted goals that have been achieved and how much is remaining for the residual time frame.

The primary purpose of these processes is to support the enterprise strategy through planned initiatives, budgeted resource allocation extent to which changes in the environment are impacting the capacity of the business to meet objectives.

Budgeting-vs-Forecasting

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Budgeting vs Forecasting (wallstreetmojo.com)

What is Budgeting?

BudgetBudgetBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time.read more is a detailed statement of an enterprise’s financial activity, which includes revenue, expenses, investment, and cash flow for a particular period (often a year).

While preparing the budget for large companies, the budget statement may comprise input from the company’s various functional departments and profit centersProfit CentersProfit Center is the segment or division of a business responsible for generating revenue & contributing towards its overall profit. Here, the objective is to increase sales & reducing the cost incurred. read more (Business units). It is a time-consuming process.

Generally, budgets are staticBudgets Are StaticA static budget is one that anticipates all revenue and expenses which will occur during a particular period, with changes in the level of production/sales or any other major factor having no effect on the budgeted data. It is also known as a fixed budget.read more and prepare for the company’s financial year. However, some organizations use a continuous budget, adjusted during the year based on changing business conditions. While this can add accuracy, it also requires closer attention and may not necessarily yield a better outcome.

For example, An enterprise provides $ 75 million for interest (@10% pa) cost in its budget. But during the year, suddenly, The Central Bank of the country increases interest rate instigating the banks to raise their lending interest too. Which shall result in higher interest cost to the company, and hence the company needs to reinstate its budget according to the new projected interest cost.

What is Forecasting?

A forecast is an assessment of possible future events. At the initial planning stage, it is compulsory to prepare to forecasts possible actions for the business in the future. Forecasts are prepared for sales, production, cost, procurement of material, and financial need of the business. The forecast has some flexibility, whereas the budget having a fixed target.

Generally, budgeting and forecasting used interchangeably or understood as the same activity (budgeting includes forecasting). However, there is a thin line between both.  A forecast is a projection of what will happen during the budgeting period at an organization level, generally include significant incomes and expenditures. A forecast may be for long term or short term period or using the top-down or bottom-up approach.

A long-term forecast will provide valuable output to the management for their strategic business plan. In contrast, short term forecast is generally is done for operational and day to day business needs.

Budgeting vs. Forecasting Infographics

Let’s see the top differences between budgeting vs. forecasting.

Budgeting-vs-Forecasting-info

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Budgeting vs Forecasting (wallstreetmojo.com)

Key Differences

Budgeting vs. Forecasting Comparative Table

Criteria/ItemBudgetingForecasting
PurposeBudgets are formulated for setting a target for the coming month or a quarter or a year.It is performed to understand whether the budgeted target will be timely met or not.
ContentIt contains absolute values that the company aims to achieve; therefore, it may include the number of units it has to sell or the amount of revenue it has to generate.As the forecast expresses expectations, it does it better through percentages, implying what proportion of budgeted values has been accomplished and how much of it can be reasonably accomplished in the residual time.
MethodologyIt observes the past trends and tries to set a realistic target based on these after smoothening for one-off or extraordinary incident.It analyses the changes in the current circumstances and tries to conclude that in the light of such events, whether the budget will be met or not.
FrequencyA budget is formulated once per period; for example, if we have budgeted the revenues and expenditures for the upcoming year, it will remain so until the year is not completed.Forecasting is done on a more frequent basis, and at times may even be done on a real-time or a constant basis so that appropriate measures can be timely undertaken in an attempt to meet the budgetary requirements.
Variance AnalysisOnce the budgeted time frame gets over, the actual results are compared to the budgeted goals to see how they have varied and whether the budget was realistically achievable or not so the future budgets are revised accordingly.No such analysis is conducted for the forecasted numbers as they are only interim numbers; in fact, forecasting in itself is a variance analysis technique.
Areas coveredBudgeting is a broader analysis, and it includes a larger number of items such as revenues, costs, cask flows, profits, items of financial position.Forecasting is a narrower analysis as it deals with only revenues and expenses and not with cash flowsCash FlowsCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more or financial position.
Structural changesAs a budget is a long term phenomenon, variances are looked at through a stricter lens. It may lead to structural changes such as R&D upgrades or CAPexCAPexCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.read more changes.Forecasting is a short term measure, and therefore it doesn’t lead to drastic changes. It may allow the management to make decisions as to increasing the shifts of workers as per change in demand; however, it won’t lead to changes such as increasing plant capacity.
Awareness levelBudgetary goals and objectives are conveyed to all levels, including the shop floor levels in manufacturing companies, so that the targeted production is achieved.Forecasted numbers are mostly for the management and the team of supervisors so that they are aware of how to manage the work to meet the targets.

In the corporate world, budget and forecast prepared at the same time and with the same inputs received from business and cost units of the enterprises. Though the purpose and approach are the same in both the statements, the use may differ.

Conclusion

We can draw a simple analogy that budget is like seasons, which are for a certain period, the maximum time of which can have a particular type of weather. At the same time, forecasting is an interim announcement of the number of rains or sun that can be expected on any given day. It can’t be predicted for a more extended period as it will get affected by changes in the daily weather and therefore, may not bring out a  truer picture if predicted from long before.

Both techniques are essential and form an integral part of the short term and long term decision making. If budgets are not formulated, the company may become directionless. At the same time, if forecasting is not conducted, then there can be a chance of oversight and piling up of wrong decisions and inaction.

Recommended Articles

This article has been a guide to Budgeting vs. forecasting. Here we discuss the top difference between them along with the key differences and comparative table. You may also have a look at the following articles –

Reader Interactions

Comments

  1. Vincent Morton says

    Hi. I must appreciate your work, you’re really doing a great job by posting such valuable blogs which are very useful and easy to understand. Thanks a lot. Hope you keep posting. I too had a question regarding Budgeting. Can you please tell me what are Top down Budgeting Approach and Bottom up Budgeting Approach?

  2. Liam Harvey says

    Awesome Blog Resource. Thanks for giving clear differences between Budgeting and Forecasting. Really informative. I will be helpful if you could answer my question. How to create cash flow forecast in business. Any steps?

    • Dheeraj Vaidya says

      Thanks Liam! I am glad that you liked this post. For business forecasting cash flow forecast can be easily broken down by using some these simple steps. They are as follows:
      1. You will need to prepare the sales forecast
      2. You need to prepare detail sheets on any other estimated cash flows
      3. You need to prepare detailed sheets on all estimated expenses or outflows
      4. You need to prepare profit and loss forecast