Budgeting vs. Forecasting

What is the difference between forecasting and budgeting?

In order to avoid crises in business, managers and owners need to use two essential tools – forecasting and budgeting. Budgeting refers to preparing a list of guidelines for expenditures for one year and it is usually done a year in advance. It is used as a benchmark in analyzing the financial health of a business. Forecasting refers to taking the financial information for a time in the past and try to compare it to how the same numbers would look in the future taking the additional circumstances into consideration. Even though both concepts are related to the management of money, they are different.

Budgeting makes sure that you have cash on hand and gives you better control over the financial activity. A budget for the upcoming year includes all the expenses and income that the company anticipates and is a plan that is expressed using numbers and financial terminology. It also sets targets for the company to meet such as staying within a certain amount of money for expenses and showing a high percentage of profit at the end of the year. Forecasting is similar, but it is a prediction of what could happen based on a previous set of numbers. It does not set any targets to meet or exceed.

In a budget, there is a specific amount of money allotted and the information in the budget explains how that money will be spent. There are also contingency plans included just in case an unexpected expense arises that could result in less income than anticipated. A forecast may or may not be accurate because it makes a prediction about the coming year based on the performance of the company in the past. Forecasting is predicting, but budgeting is planning. You can prepare a budget by using forecasting techniques. A company rarely makes a big expenditure without studying the impact it will have on the budget and the business activities.

With the many factors that influence budgeting and forecasting, it is hard to generalize. This is because of uncertain market conditions and how the company performs in any one year has implications for the future of the business. For this reason, companies should always do both budgeting and forecasting before entering into any new ventures. They are both essential in making managerial decisions.

Summary

  1. Budgeting refers to planning for the future, but forecasting uses the past to predict the future.
  2. Budgeting is based on certainties, but forecasting is based on uncertainties.
  3. Budgeting is done for a year at a time, but forecasting is done for a longer period of time.
  4. In companies that do not do budgeting, there should be some form of forecasting.