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How to Differentiate between Business Forecasting and Budgeting

As a CFO, I am frequently asked what the differences are between a forecast and a budget. Think of a forecast as what you want to happen in the future, while a budget helps you manage what will happen now. These are two financial planning tools business personnel may use in the decision-making process.

Here are some characteristics of a forecast:

· Forecasting estimates a company’s future financial outcomes by examining research and historical data.

· The forecast is typically limited to major revenue and expense line items. Cash flow may be forecasted and there is usually no forecast for financial position.

· Management teams use forecasting to anticipate end results based on previous financial data.

· There is no variance analysis that compares the actual results to a forecast.

· Forecasts are updated regularly when there is a change in operations, inventory and business plans. Companies may update their forecasting models perhaps monthly or quarterly.

Here are some characteristics of a budget:

· A budget estimates the amount of revenues and expenses a company may incur over a future period of time. A company’s budget is usually updated once per fiscal year.

· The budget is compared to actual results to determine variances from expected performance.

· Budgeting represents a business’ financial position, cash flows and goals.

· A budget may trigger changes in performance compensation paid to employees.

· The management team may bring actual results back into line with a budget.

In summary, forecasting is a more useful tool than budgeting. A forecast provides a short-term representation of the actual circumstances and can be used to take immediate action. On the other hand, a budget may contain targets that are not achievable, or market circumstances have changed so much that it is not wise to attempt to achieve.

Forecasting is one function that business owners and investors can appreciate. Conversely, a budget is not always used by businesses and is not as important.

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