Budgeting vs Forecasting: What's the Difference?

Budgeting and forecasting activity varies for every industry. However, its significance is the same for all companies. Although these terms get interchangeable, businesses must analyze and practice them distinctly. Let us learn about the difference in this article. 

Budgeting vs Forecasting: What's the Difference? 

Budgeting and forecasting are two essential activities an organization performs every year to guide its goals. Although these terms get used interchangeably from time to time, these two have a very distinct meanings if studied thoroughly. Budgeting quantifies the revenue and expenditure a business wants to incur in a specific period; forecasting entails estimates of such revenues and expenses to achieve. While budgeting discovers the route the company should head towards, forecasting ensures it is correct. Budgeting expresses the company's desire and expectations, whereas forecasting provides estimates of what they will achieve. Budgets outline expectations, and forecasts estimate future outcomes by relying on historical data.  

Budgeting lays the foundation against which actual results get compared. Businesses evaluate it periodically to incorporate updated information to make rational decisions. Even though companies can create it for a year, they can make changes to it during the year to accommodate up-to-date information.  

Forecasting involves estimating expenses and revenues based on historical performance. The previous financial data highlights the trend for upcoming data. It does not take into account deviations from actual performance. It gets updated regularly for a short or long time. It allows adjustments in production or inventory levels in the short term and business plans in the long term.  

Critical differences in budgeting and forecasting:  

• Purpose: 

Budgeting aims to set targets for the upcoming month, quarter, or year. It expresses what a business wants to achieve. It relates to the aims and objectives for the forthcoming period. On the other hand, forecasting estimates whether the company will complete the budgeted target on time. It states actual financial expectations of the outcome, usually in a summarised format. It monitors the company's progress towards goals and verifies whether the plans will be timely met.  

• Content: 

The former contains absolute values in budgeting and forecasting while the latter expresses in percentage. Budgeting involves numbers like the number of units to sell, desired revenue generation in a year, and more. Forecasting indicates the ratio and proportion showing how much budgeted goals companies have achieved and how much the company can accomplish in the remaining period.  

• Modology: 

Budgeting studies the past trends and records of outsourcing accounts payable services and uses it as a base to set realistic targets after considering any unusual or supernormal events. Forecasting studies the current circumstances and scenario to evaluate its impact on the time taken to meet the budgeted goals.  

• Frequency: 

While companies can prepare budgets once in a specific period and analyze their impact till the year-end, say monthly, quarterly, yearly, etc., forecasting involves frequent verification of measures taken in real-time to meet the budgetary requirements. It may become a consistent practice for the company.   

• Variance analysis: 

Budgeting involves comparing budgeted time and money with actual results to see the variance. You can analyze whether it is realistic to achieve or not. Monitoring and evaluating its performance enables companies to revise future budgets, keeping the changes in their requirements.  

Forecasted numbers are interim numbers instead of part of the variance analysis technique. Companies can use these numbers to do more than expand.  

• Scope: 

A company's budgeting and forecasting activity provide a broader analysis of cash flow, revenue, profits, financial position items, and costs in financial position items. It allows businesses to track their expenses and keep them in control. 

You can outsource budgeting & forecasting to experts to help you perform the same in proficient manner. Like other accountings services like outsourcing accounts payable services, payroll or bookkeeping services, outsourcing budgeting & forecasting can help a big deal. 

Also read-4 Approaches to Automating Recurring Accounting Tasks