All businesses engage in budgeting and forecasting activities to some degree.
Budgeting and forecasting help senior managers formulate strategies, plan for the future, and align their goals across the entire organization. Both processes are crucial components of any company’s business cycle, especially during periods of rapid growth.
But even though budgeting and forecasting are similar, there are some key differences that set them apart. It’s important for finance leaders to understand these differences so they can prioritize what’s important and allocate their resources accordingly. Some organizations might even go as far as assigning budgeting and forecasting to seperate teams in order to keep a clear focus on each process.
So what is budgeting, what is forecasting, and why are they both so critical? To appreciate what they are and how they contribute to organizational success, let’s unpack budgeting and forecasting and drill into the main differences between them.
What’s the Difference Between Budgeting and Forecasting?
At a high level, budgeting is figuring out how much money a company will need to spend over a given period of time in order to achieve its desired business results. Forecasting, on the other hand, is the process of proactively analyzing the budget and using both historical and real-time data to predict what those business results are expected to look like.
In other words, the budget is a road map, highlighting key financial checkpoints for every phase of the business journey. But once that journey has started, it’s common for circumstances to change, ultimately outdating the original assumptions that were made when the budget was created. For proactive finance teams, best practices involve regularly reviewing the company’s budget plans against the changing business environment, forecasting accordingly to determine where the numbers are headed, and adapting as required.
Now, let’s take a deeper look at what budgeting and forecasting mean to an organization, and further examine how they’re different even though they complement each other.
What is Budgeting?
Budgeting is the process of planning a company’s revenue and expense figures for a specific period of time. It involves identifying available cash flows and allocating financial resources for the company’s required spending.
The budget is used to chart the company’s course and assist management with strategy development. The process results in a clear plan that reflects the organization’s financial goals. Here are the primary characteristics of a corporate budgeting process:
- For an annual budget, the process typically takes three to six months to complete.
- When finished, the budget includes detailed financial documents such as the income statement, balance sheet and cash flow statement.
- The budget provides measurement metrics that management can use to assess financial progress.
- The budget is periodically compared to the company’s up-to-date financial results, which provides real-time insight into how the company is performing. A variance analysis of the actual versus budgeted income statement is a good example of this.
- Company-wide employee compensations are determined through the budgeting process, and individuals are often compensated based on their performance relative to the budget.
- The budget is not normally disclosed to external parties.
Benefits of Budgeting
Budgets are typically prepared annually, and they provide important guidance regarding what businesses can expect to accomplish during that year. Proper budgeting has plenty of other benefits, including:
- The budgeting process forces management to take a hard look at all of the company’s financial activities and assess the viability of each individual expense.
- Budgeting requires detailed documentation of all the sources and uses of cash, which enables management to anticipate cash flows with accuracy.
- Since budgeting usually starts from the bottom up, many employees are involved in the process. This instills a sense of ownership among the employees, who are more motivated to meet their budgeted goals.
- You can gauge the health of your business by comparing actual results to the budget.
- Since individual responsibilities and internal hierarchies are often accentuated during budget season, this clarity of roles can promote rapid responses to many situations.
- The budgeting process makes it clear where and when financial resources will be needed, enabling you to allocate them accordingly.
However, because budgets are prepared so far in advance and based on a fixed set of assumptions, they can quickly become outdated as soon as those assumptions change. This is where forecasting takes over—when budgeting can’t meet certain time-sensitive needs.
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What is Financial Forecasting?
Forecasting is the process of using historical data as well as insight from management to predict a company’s future business results. Done over a compressed time frame, forecasting focuses on major financial line items for revenues and expenses. Here are the main characteristics of the forecasting process:
- Forecasting is performed regularly after financial statements are released, usually right after a month-end or quarter-end. By necessity, the time frame is short, lasting from days to a few weeks.
- Forecasts generally show summarized projections of major revenues and expenses.
- Key performance metrics are updated based on forecasted numbers, providing insight into how the business is doing.
- Actual income statements are not usually compared to the forecast. Rather, the actuals are used to help predict financial results.
- Forecasts don’t normally trigger employee compensations.
- Publicly traded companies must disclose their high-level forecasts to investors.
- Rolling forecasts (discussed below) are always based on the most recent financial data, and therefore provide timely, relevant and valuable information to decision makers.
Benefits of Forecasting
When done efficiently with the right data, forecasting epowers management teams with the insight they need to make proactive business decisions. There are plenty of other benefits to forecasting, including:
- Accurate forecasts of revenues and expenses enable management to adjust the direction of the company if the forecasted trends justify such action.
- Knowing where future expenses are likely to fluctuate makes it easier to manage cash flows and capital requirements.
- You can capitalize on financing and investment opportunities if you present accurate, reliable forecasts to your investors.
- You can reallocate both human and financial resources to where they’re most needed according to your forecasts.
- Your forecasts may also help your next budgeting process by drawing on the data as the logical basis for the budget.
- Forecasting enables management to focus their attention where it’s needed, especially in the short term.
Static, periodic forecasts are beneficial even though they usually only project out to the end of the current fiscal year. Rolling forecasts, on the other hand, are even more useful because they use up-to-date financial data and extend beyond that timeline.
Rolling forecasts are used monthly or quarterly to plan for a defined period of time that’s beyond the scope of the budget—like the next five quarters, for example. So instead of projecting to the end of the fiscal year, most rolling forecasts will predict the next 12 months or more.
In addition to all the benefits of static forecasts, rolling forecasts are important for the following reasons:
- Businesses that prepare continuous rolling forecasts have more accurate information about industry trends, economics and other factors, ultimately allowing them to identify and reduce risks, as well as reallocate resources.
- Rolling forecasts use real-time data so they stay relevant all the time. You can tweak your forecasts with up-to-the-minute numbers, especially when the process is integrated with forecasting software and other enterprise applications.
- This integration also enables on-demand forecasts, which means users have access to better business intelligence and can respond quickly to time-sensitive situations.
Ready to make the move away from the static annual budget? Check out, Let’s Get Rolling: 10 Tips for Moving from Static Budgets to Rolling Forecasts.
Key Differences Between Budgeting and Forecasting
As noted previously, budgeting and forecasting are not the same. Even the related activities, timeframes, preparation times, use cases and reporting requirements are different. The following table highlights the key differences between budgeting and forecasting:
|Projected Timeframe:||1 – 5 years||Static Forecasts: Usually for the remaining current fiscal year. Rolling Forecasts: Usually for the next 5 quarters or more.|
|Preparation Time:||3-6 months||2-4 weeks|
|Variance Reporting:||Comparisons of actual to budget||No comparisons to actual|
|Financial Statements:||Produces detailed statements||Targets major revenues and expenses|
|External Disclosure:||Not disclosed||Disclosed|
|Employee Compensations:||Triggers compensation calculations||Does not trigger compensation calculations|
|Financial Predictability:||Loses relevance because of stale data||Higher relevance because of fresh or real-time data|
|Best Used For:||Formulating high level strategies and goals||Targeted decisions in specific areas|
The Importance of Budgeting and Forecasting in Business
The importance of budgeting and forecasting in the business world cannot be overstated. Budgeting allows management to set goals for the future, and forecasting gives finance teams the power of actionable insight.
Both are necessary and complementary. Even though the budget might become stale as soon as it’s released, the process encourages transparency between departments, and enables employees to own what they’re responsible for.
And where budgeting falls short, forecasting takes over. Forecasting delivers timely and accurate financial projections that guide strategy adjustments even after the budget has been finalized.
Individual companies will all handle budgeting and forecasting processes differently, but one thing rings true for everyone—both budgeting and forecasting are better served when you integrate the processes with software that improves accuracy, timeliness and reliability.
Modern Budgeting and Forecasting Software Solutions
If you want to stay in control of your budgeting and forecasting cycles, using a modern software solution is a no-brainer. There are tons of benefits, including:
- Speeding up your budgeting and forecasting cycle times by 50% or more.
- Automating manual processes like copying and pasting data entries.
- Improving the quality of your budgets and forecasts.
- Integrating your financial data from other systems with Microsoft Excel—a trusted software that financial professionals refuse to give up.
- Increasing data accuracy and creating a single version of the truth that your whole finance team can work with.
- Improving the accuracy and usefulness of forecasts by leveraging rolling forecasts and accessing up-to-the-minute financial data.
- Freeing up your finance staff to focus on value-add analysis instead of troubleshooting what’s wrong with their spreadsheets.
Vena Solutions is a leading provider of budgeting and forecasting software. Vena offers better ways to manage your budget without replacing Excel, and also promises a significant reduction in cycle times. When you use Vena’s platform for forecasting, you’ll have access to real-time numbers and a single source of truth for all your financial data. The bedrock of Vena’s functionality is its seamless integration with Excel which makes it easy to adopt the platform, and ultimately improve the reliability of every finance process with built-in error-checks and version controls.
If you want to learn more about how you can turn Excel into a more powerful tool for budgeting and forecasting, read our free eBook, Excel For The Win: A Finance Guide for Spreadsheet Believers.