Difference Between Budget and Forecast

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

Key Takeaways

1. A budget is a financial plan that outlines expected income and expenses for a specific period. At the same time, a forecast estimates future financial performance based on past data and trends.
2. A budget is used to plan and control spending, while a forecast is used to anticipate future financial needs and opportunities.
3. A budget is usually more detailed and specific than a forecast, which provides a broader overview of financial trends and projections.

Budget vs Forecast

The difference between a Budget and Forecast is that a budget shows you the plan of the company to achieve specific goals, whereas a forecast gets you to know what goals will be achieved. The senior management can get the budget updated once a year. A forecast can be updated monthly 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 the management aligns a forecast shows 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

Parameter of Comparison	Budget	Forecast
Purpose	To get the representation of goals that management wants to achieve.	To calculate what goals will be achieved to realign the plan accordingly to meet the result expectations of the budget.
Revision	Revision 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.
Preparation	Budgets are prepared significantly less in comparison to forecasts. It gets prepared maybe only for one accounting period.	It prepares for short-term projections, i.e., a quarter, or long-term, i.e., several years.
Nature	Static. Once updated, it does not need any alteration shortly.	Much more flexible and can be updated a lot of time
Impact	It helps businesses to operate better during an accounting period.	It helps businesses to grow even further.

What is Budget?

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

Budgeting includes all sorts of things a company’s management should consider while considering its growth.

It consists of a rough estimate of expenses and revenues, cash flows that management expects, etc. On getting the actual results, the budget is finally 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 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 pretty 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 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 to realign their goals to get results. The variance cannot be calculated here by comparing the outcome.

The forecast gets updated much more frequently than budgeting. It is updated monthly or quarterly.

Any change in the business plan or workflow needs to be revised.

Forecasting helps a company’s management team to think clearly and make better decisions by analyzing its results.

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 will happen once the budgeted period starts.
   However, forecasting is the representation of financial outcomes by considering 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 the short term. However, forecasting is done for a very long period, sometimes years.
4. When it comes to flexibility, budgeting is static. It is not updated often to keep up with the prevailing market conditions.
   Forecasting, on the other hand, requires real-time information, which needs to be updated occasionally.
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.

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