Difference Between Budget and Forecast (With Table)

Budget and Forecast are the primary things to consider by an organization if it wants to function properly. The function of both the terms might sound similar, but it’s not.

Budget vs Forecast

The difference between Budget and Forecast is that a budget shows you the plan of the company to achieve specific goals, whereas the forecast gets you to know what goals will actually be achieved. The senior management can get the budget updated once a year. A forecast can be updated every month as it rapidly states where a company is heading.

The forecast can also be used for short term tasks such as changes in production plans, staffing, etc. The actual results that a forecast shows are aligned by the management to achieve the goals mentioned in a budget.

The budget is nothing but a representation of the results that management wants to achieve in the future. However, the forecast shows you how you are doing in chasing those goals. Once you go a little off track, you can set yourself back by the data provided by the forecast.

Comparison Table Between Budget and Forecast

Parameter of ComparisonBudgetForecast
PurposeTo get the representation of goals that management wants to achieve in the future.To calculate what goals will actually be achieved so to realign the plan accordingly in order to meet the result expectations of budget.
RevisionRevision is done very few times here; maybe once a year or as management wants to revise it.Revision is done frequently; sometimes it’s done monthly or quarterly.
PreparationBudgets are prepared very less in comparison to forecast. It gets prepared maybe only for one accounting period.It gets prepared for projections which are short term i.e., a quarter, or long term i.e., several years.
NatureStatic. Once updated, it does not need any alteration in the near future.Much more flexible, and can be updated a lot of time
ImpactHelps businesses to operate better during an accounting period.Helps business to grow even further.

What is Budget?

Budgeting helps a company to represent whatever they want to achieve in a certain period of time. This particular time period is usually one year.

Budgeting includes all sorts of things, about which a company’s management should consider while thinking of its growth.

It consists of a rough estimate of expenses and revenues, cash flows that management is expecting, etc. On getting the actual results, at last, the budget is compared to it, to figure out the variances in the workflow.

Budgeting also helps to know about the financial health of a business. A company’s budget usually gets updated every year. This totally depends on how management wants their budgeting to get updated.

Comparing the outcome with the expectations in the budget helps to know how much the results got varied from the prediction.

A budget might also contain goals that are quite impossible to achieve or for which the conditions in the market have changed.

Therefore, forecasting is also something significant needed to strategize better.

What is Forecast?

Forecasting helps a business to know the financial results by studying the historical data. The financial information which has been recorded from previous years helps a company to predict the results.

Forecasting helps a company in its budgeting, too.

It allows them to see where they need to realign their goals in order to get results. The variance cannot be calculated here by comparing the outcome. Forecast gets updated much more frequently than budgeting. It is updated monthly or quarterly. With any change in business plan or workflow, it needs to be revised.

Forecasting helps the management team of a company to think clearly and make better decisions by analyzing the results of it.

Such decisions include changes in production or inventory. It also helps a company to make a strong business strategy out of a long-term forecast.

Main Differences Between Budget and Forecast

  1. Budgeting is when a company estimates the revenues and expenses that are going to happen once the budgeted period gets started.
    However, forecasting is the representation of financial outcome by taking into account the historical data.
  2. The budget clearly shows what goals a company’s management wants to achieve in the budgeted period, while forecasting helps you to see in which direction your company is headed.
  3. Budgeting is done for one accounting period, or you can say for short-term. However, forecasting is done for a very long period, years sometimes.
  4. When it comes to flexibility, budgeting is kind of static. It does not get updated quite often to keep up with the prevailing market conditions.
    Forecasting, on the other hand, requires real-time information due to which it needs to be updated every once in a while.
  5. Budgeting offers variance analysis by which you can know where you have gone off from the expected result. However, forecasting doesn’t provide variance analysis by comparing the actual results.

Conclusion

The budget is the representation of the goals that management wants to achieve in the budgeting period. However, forecasting helps to know what goals will actually be achieved. It also states the direction a company is heading in.

Many times, a budget has specific goals that are unachievable due to the changes in the market circumstances. In order to consider using a budget, it should be updated more frequently than just once a year so it can catch up with the current market scenario.

Therefore, it is essential to rely on the forecast more than budgeting.

The forecasting allows you to see the actual conditions in which the company stands. Therefore, it makes it easier for you to take the necessary actions immediately.

In the budget, you can calculate the variance by comparing your estimation with the actual results. It is not possible to calculate the variance by comparing the result in the case of forecasting.

References

  1. https://onlinelibrary.wiley.com/doi/abs/10.1111/auar.12071
  2. https://cld.pt/dl/download/7de47e74-27f1-4dc1-a8f7-c8daa4fad7ee/Apontamentos%20NEG%20-%202%C2%BA%20ano%3B2nd%20year/English/Management%20Accounting/Group%20Work/Paper%205%20-%20Budgets_EAR.pdf
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