What's the Difference Between Budgeting and Forecasting

Budgeting and forecasting have their differences. They all boil down to their particular roles when it comes to your business. You perform forecasting to see a bigger picture of what you want to achieve in your company and the various factors involved. Meanwhile, budgeting is the step-by-step financial procedure that shows your revenue expectations and expenses.

To help you understand the difference between the two, here are some of the essential things you need to create accurate forecasts and budgets for your business.

Understanding Forecasting 

Financial forecasting is the process of predicting your future business outcomes and performances using existing data and informed opinions. If you want to do a forecast, you need to consider the factors that affect your business and the macroeconomic factors, such as the political and social influences that stir your market.

Forecasting can be short-term or long-term. It means you need to create multiple forecasts to get more accurate projections of your business scenarios.

Types of Forecasting

There are two types of forecasting: judgmental forecasting and quantitative forecasting.

  • Judgemental Forecasting

Judgemental forecasting happens when you rely on the informed opinions of your target audience and your personal knowledge of the market to create financial predictions. Chances are, your instincts are wrong. So use this type of forecasting when you don’t have any historical data to back up your decision-making.

  • Quantitative Forecasting

Quantitative forecasting requires data to back up business predictions. Gathering and analyzing data is essential for seeing market conditions, economic patterns, industry trends, and consumer behaviors. You also use the data to predict changes and new opportunities for your business.

You can use one of the two forecasting techniques, but many businesses combine them to plan their trajectories, determine their future costs, and forecast their sales and market demands.

How You Can Prepare a Forecast for Your Business

Here are steps you can take to prepare a forecast for your business.

  1. Examine your existing business records for each month.

  2. Pay attention to your cash flow, income, revenue, and expenses.

  3. Identify your goals and objectives in doing the forecast.

  4. Choose your forecasting technique: judgemental, quantitative, or both.

  5. Prepare your financial statements: balance sheet, income statement, and cash flow statement.

  6. Update your sales predictions and revenue forecast regularly.

A Closer Look at Budgeting

Budgeting is a smart way to plan and allocate your business’ finances across critical areas by drawing up a budget.

A budget contains your projected expenses, cash flow, and estimated revenue for your daily operations over a certain period. Through budgeting, you can gauge and test your idea’s viability. For instance, before you create a financial budget, it may be hard for you to visualize your business expenses and revenue plans. But if you prepare a detailed financial budget outline, you will know what is achievable and what is not. 

Budgets are short-term, unlike forecasting. This is because your expenses and revenue are not entirely predictable and are usually done annually.

Types of Budgets

You can adopt any of the six budgeting techniques depending on your business model.

  • Value Proposition Budgeting

Value Proposition Budgeting ensures that each item in the budget creates value in your business.

  • Incremental Budgeting

Incremental budgeting is where you add or subtract the percentage from your preceding budget.

  • Zero-Based Budgeting

Zero-based budgeting is when you need to lower your costs and explain all your expenses.

  • Cash Flow Budgeting

Cash flow budgeting is to account for all potential lines of credit to increase your cash flow.

  • Surplus Budgeting

Surplus budgeting is to account for the excess revenue you have in your business.

  • Activity-Based Budgeting

Activity-based budgeting is to map out a certain volume of inputs for you to achieve your projected output.

How to Prepare a Budget for Your Business

Most small businesses have a finance and accounting team. Some small business owners take the responsibility of planning the company’s expenses and drawing a budget. But how do you do it?

Here are the things you should keep in mind when creating a budget.

  1. Answer these questions:

    1. What’s your current business state?

    2. What’s the most important goal you want to reach?

    3. What is your big picture?

  1. Now that you have the proper context, you need to:

    1. Know how many income sources you have and how much money your business makes.

    2. Jot down your variable, fixed, and one-off expenses.

    3. Sum up everything to know how much your business cash flow and profit are.

  1. Your budget should have:

    1. A realistic cash flow prediction

    2. Cash reserves

    3. Debt reduction

    4. Estimated expenses and revenue

The Main Differences between Forecasting and Budgeting

Budgeting and forecasting may confuse you because they may appear similar. But when you analyze them, there are a few differences between them.

  1. A budget is short-term, while forecasting can be both short-term and long-term.

  2. A budget is more static as compared to forecasting. Forecasting undergoes various adjustments as the economic and business situation changes.

  3. A budget shows planned expenses and revenue over a period, while forecasting is a detailed projection of your business outcomes for the future.

Conclusion

You can do forecasting and budgeting interchangeably, but they are not the same in terms of small businesses. Your forecast will help you understand high-level business goals and how you can reach them, while your budget can help you manage your business expenses. 

Totally Booked streamlines the financial side of your business to make it less intimidating. They handle all the aspects of bookkeeping in New York, including payroll, sales tax, custom reporting, bank reconciliations, and budgeting in your small business. Browse our website now to know more about how we can help to focus on what you do best as we take care of the rest.



Kelly Gonsalves