Budgeting and financial forecasting are tools that companies use to establish a plan regarding where management ideally wants to take the company (budgeting) and whether it is heading in the right direction (financial forecasting). Although budgeting and financial forecasting are often used together, distinct differences exist between the two concepts. Budgeting quantifies the expectation of revenues that a business wants to achieve for a future period, whereas financial forecasting estimates the number of revenues that will be achieved in a future period.
A Budget is an outline of expectations for what a company wants to achieve for a particular period, usually one year. Characteristics of budgeting include:
- Estimates of revenues and expenses
- Expected cash flows
- Expected debt reduction
- A budget is compared to actual results to calculate the variances between the two figures.
Budgeting represents a company’s financial position, cash flow and goals. A company’s budget is usually re-evaluated periodically, usually once per financial year depending on how management wants to update the information. Budgeting creates a baseline to compare actual results to determine how the results vary
Financial forecasting estimates a company’s future financial outcomes by examining historical data. Financial forecasting allows management teams to anticipate results based on previous financial data. Characteristics of financial forecasting include:
- Used to govern how companies should allot their budgets for a forthcoming period. Contrasting budgeting, financial forecasting does not analyse the changes between financial forecasts and actual performance.
- Regularly updated, possibly monthly or quarterly, when there is a change in operations, inventory, and business paln
- Can be both short-term and long-term. For example, a company might have quarterly forecasts for revenue. If a customer is lost to the competition, revenue forecasts might need to be updated.
- A management team can use financial forecasting and take immediate action based on the predicted data.
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