Firms often grapple with budget vs forecast debate, not realising that these financial tools are equally important for their business’ long-term planning.
While budgeting empowers companies to understand their financial goals, forecasting helps them analyse how many of these goals are achievable.
Budget vs forecast: Definition
Even though both budget and forecast are tools reflective of the results of a company’s strategic plans, they are quite different.
A budget is a financial plan that quantifies what a firm “wants to achieve’. It is a detailed representation of the firm’s strategic plans in terms of future financial position and cash flows. It is generally static and is mostly updated yearly.
In contrast, a forecast estimates what a firm ‘will actually achieve.’ In other words, it is concerned with whether the firm will be able to achieve its goals and, if not, then how far off the mark it will be. It is pretty dynamic and is updated on a rolling basis.
Budget vs forecast: Example
Let’s illustrate the difference between budget vs forecast with examples.
Consider a petrochemical company NJI that has budgeted for quarterly growth of 6.7%, assuming the oil prices will hover around $75/bbl. However, due to unforeseen circumstances (like a war), oil prices shoot up to $110/bbl, thereby adversely impacting its profitability.
Here, 6.7% is the budgeted growth, which is static. However, as the company NJI realises that the oil prices are soaring, it is likely to update its forecast per the new trend.
Difference between budget and forecast in tabular form
Basis
Budget
Forecast
Meaning
A budget is a financial plan that details a firm’s goals and objectives for the upcoming period. It also functions as a spending limit.
A forecast is a report which tracks the achievement of goals outlined in the budget.
Objective
The main purpose of a budget is to state focused and well-defined objectives for meeting financial goals, such as quarterly/yearly growth, revenue, marketing, etc., and establish accountability.
The primary objective of a forecast is to regularly monitor whether the firm is on track to meeting its budgeted targets within the specified period.
Content
A budget entails specific goals, such as the number of units to be sold, sales amount, etc.
A forecast is generally stated in percentage terms, i.e., % of the budget already achieved.
Frequency
A budget is a one-time event lasting throughout the specified period (quarter/year) with no revisions.
Forecasting is done more frequently, with many firms treating it as a real-time tool, with continuous revisions to keep track of the budget.
Methodology
A budget is formulated based on past trends and historical performance that have been smoothed out.
A forecast is framed and updated per the company's current financial position.
Variance Analysis
At the end of the targeted period, variance analysis is carried out to compare the actual results with the budgeted targets.
A forecast is the variance analysis technique used to compare the budget to the actual performance.
Scope
A budget has a broader scope, as it involves analysing data from the balance sheet, P&L account, and cash flow statement.
A forecast is narrower in scope as it is limited to estimating revenue and expense items. It doesn’t deal with the firm’s financial position.
Impact
The budget variances can propel the management to bring structural changes in the organisation, like changes in compensation, capex plans, and R&D.
Forecasts do not result in any major changes. These are usually employed for undertaking short-term measures, including changes to staffing, inventory management, or production.
Budget vs forecast vs actual
The budget vs forecast vs actual chart is as follows:
Budget
Forecast
The targets your company wants to achieve.
The budgeted targets that the firm is predicted to achieve per current trends.
A company expects to achieve £100,000 in monthly sales.
Based on current conditions, it forecasts only £95,000 in monthly sales.
A budget entails specific goals, such as the number of units to be sold, sales amount, etc.
A forecast is generally stated in percentage terms, i.e., % of the budget already achieved.
A budget is a one-time event lasting throughout the specified period (quarter/year) with no revisions.
Forecasting is done more frequently, with many firms treating it as a real-time tool, with continuous revisions to keep track of the budget.
A budget is formulated based on past trends and historical performance that have been smoothed out.
A forecast is framed and updated per the company's current financial position.
At the end of the targeted period, variance analysis is carried out to compare the actual results with the budgeted targets.
A forecast is the variance analysis technique used to compare the budget to the actual performance.
A budget has a broader scope, as it involves analysing data from the balance sheet, P&L account, and cash flow statement.
A forecast is narrower in scope as it is limited to estimating revenue and expense items. It doesn’t deal with the firm’s financial position.
The budget variances can propel the management to bring structural changes in the organisation, like changes in compensation, capex plans, and R&D.
Forecasts do not result in any major changes. These are usually employed for undertaking short-term measures, including changes to staffing, inventory management, or production.
Budget vs forecast vs projection
Like budget and forecast, many financial analysts end up using forecast and projection interchangeably. However, these terms vastly differ, as explained below.
Basis
Budget
Forecast
Meaning
States the financial aims of the company.
States the targets that will most likely be achieved considering the current data.
Example
If a company decides to expand into a new market, its target goals will be a part of the budget.
If a company has already decided to expand into a new market, its estimates are called forecasts, which will be updated as performance data rolls in.
Budget vs forecast vs plan
Firms carry out planning, budgeting, and forecasting as a three-part process of setting and executing their long-term goals. While a plan sets the overall vision of the organisation, say over the next three to five-year period, a budget helps put this plan into action.
A budget details the financial goals to be achieved (monthly/yearly) during a specific period, and a forecast predicts how close the firm is to achieving its budgeted targets.
Budget vs forecast vs target
Finally, targets differ from budgets and forecasts as they represent specific and measurable goals. To illustrate, a company eyes a marketing budget of £100,000, updates it to £120,000 (forecast) per changing conditions, and then targets to raise it further by 20% to £144,000.
Budget vs forecast variance
Unlike a budget, a forecast does not entail any variance analysis. You can use a budget vs forecast actual template to compare the actual results with the budgeted targets.
Key Takeaways
The importance of budgeting and forecasting in project management cannot be emphasised enough. Firms must adequately weigh in on the budget vs forecast debate, design a budget with reachable goals, and continuously monitor and upgrade their forecasts to spur resource efficiency, growth, and accountability.
