Once companies earn revenue, they have to have a plan in place so they know what to do with this money. This is done by forecasting and budgeting. While these two terms are often used interchangeably, they actually mean different things.
Why does it matter if you’re not a business owner? At Power Finance Texas, we believe in bolstering financial literacy. It’s important to learn everything you can about finances so you can make the best decisions in your life. With that in mind, read on to find out what the difference is between a forecast and a budget.
What Is a Budget?
As a consumer, you may be aware of what a budget is. You probably know that a budget helps you plan your finances. You use a budget to allocate your income to different sources, such as bills, groceries, and other expenses.
Companies use a budget to do pretty much the same thing. A budget is a plan for where the managers want to take the company. It involves expectations for what the business wants to accomplish.
Here are some elements of a budget:
The budget typically includes results, financial positions, and cash flow during a specific period.
The budget is compared to actual results to look for differences and predict future performance.
The budget is typically updated just once per year.
What Is a Forecast?
While a budget lays out a plan for the business, the forecast estimates what will happen and typically indicates where the company is going. These two may not be the same.
A forecast is generally more useful than a budget because budgets are not always realistic. They often include targets that are simply unattainable. A forecast, on the other hand, gives an actual representation of short-term circumstances.
Here are some elements of a forecast:
- A forecast is usually not as comprehensive as a budget. Generally speaking, it is limited to major revenue and expenses.
- A forecast is updated more frequently than a budget, perhaps as often as monthly.
- Forecasts may be used for short-term operational elements, such as staffing and inventory.
Main Differences Between a Forecast and a Budget
So now that we’ve defined forecast and budget, here are some differences between the two.
Expectations vs. Actual Results
A budget is more focused on expectations. It is not an accurate look at the company; instead, it represents what the company wants to achieve, which can be wildly different. A forecast, on the other hand, shows actual financial results. It shows how the company is performing at present.
Present vs. Future
Along the same lines, a budget predicts the future. It looks at future expenses and performance to predict what the company wants to happen. A forecast, however, looks at the present situation. It relies on current data to help managers make better decisions. This is one of the biggest differences between a forecast and a budget.
Static vs. Adjustable
Forecasts are more adjustable than budgets. Whereas budgets are usually updated once a year, forecasts can change many times over a year—sometimes even monthly.
What Comes First: Budget or Forecast?
So which one comes first? Like the chicken vs. the egg question, this is not necessarily easy to answer. The short answer is neither. Budgets and forecasts don’t work on the same timeframe, so technically, you can’t say one comes before the other.
That’s because a budget does not exceed one year. However, a forecast can exceed two years or more. While you could say your forecast comes first, a forecast is technically based on a budget, so you could also say the budget comes first.
In any case, budgets and forecasts should ideally work in tandem. While the forecast is ultimately more helpful for a business, there needs to be a budget in place to set goals, and this allows for a forecast to work properly.
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Whether you’re a business owner or consumer, it’s important to learn as much as you can about money so you can position yourself for financial success. Power Finance Texas can help. Contact us today to learn more about our services.