Budgeting Vs. Forecasting
To some extent, we all have to deal with budgeting and forecasting activities, whether its personal finances at home or a company’s financial planning. The two are often linked as components of the financial economy. Either we can choose to look ahead and make better financial decisions. Or, choose to not look ahead.
When it comes to strategic marketing, budgeting enables the company to operate efficiently. When organizations can establish an economical marketing plan; it adds fuel to your business marketing objectives. A company can be more productive once they have an idea of what the business will look like in the future. In the past, budgeting used to involve much guessing. Nowadays, there are tons of tools that allow businesses to develop an accurate budget.
Furthermore, budgeting and forecasting helps you protect your business finances. It provides you with a summary of your business income along with your expenses. This empowers you to decrease your financial distress at times of uncertainty.
How are they Different?
However, many people confuse the two financial aspects, both at personal and corporate level, which may have some differences that differ. Some companies even go so far as to clearly classify the tasks of budgeting and forecasting in different departments and teams, in order to focus on each process.
Simply put, take the budget as a roadmap that identifies financial checkpoints for each stage that gets in the way of business travel. But once this journey has begun, circumstances often change. Ultimately, the changes will result in an outdated budget originally drafted. To be proactive and take precautions; ideally, companies must review their budgets against the background of changes in the business environment and forecast accordingly to adapt.
At its core, budgeting is about figuring out how much money an organization needs to be operational for a certain period. It can be as detailed as possible and usually includes income, expenses, cash flow and financial position. Similarly, we often set different budgets in our personal lives, for utility bills, food, essentials, leisure, etc.
As a tool, it is used as a management tool to enable the company to operate effectively. Sound financial results can be compared to what the budget was, and the differences (i.e., variances, in a corporate tone) can be analyzed. In the event, an expenditure in a particular area is higher than the budgeted figures; the individual or company must determine whether the extra expenditure involves additional recurring costs or simply additional expenditure in that particular month/year.
Forecasting refers to estimates of total revenues, expenditures or profits. It can be conducted for a long-term or a short-term and can go top-down or bottom-up. As a tool, it allows a company make adjustments, and other changes, to its spending budgets during a year when business is changing.
Likewise, large events or expenses suddenly appear in personal life, which makes future financial planning indispensable. For example, the car breaks down or the dishwasher starts up, which requires hundreds of dollars in maintenance, leaving the original budget somewhat out of use. Take an example of a company: if a major customer reduces or adds business volume with the company, it will ultimately have a significant impact on operating business and cash flow. This is where forecasts for companies come in.
The Final Verdict
In this way, the two financial branches, budgeting and forecasting, are not mutually exclusive, although they have different functions. Perhaps, an effective forecast leads to the creation of a concrete and reliable budget. In the course of the financial year, equating the latest forecast with the budget for the rest of the coming period can help the company or individual to make the necessary adjustments to meet changing conditions. In order to make budgeting and forecasting more solid, remember to keep an eye on everything and be flexible with changes.