What’s the Difference Between a Budget and a Forecast?
Budgeting and Forecasting are two financial functions that are critical if you want to drive your business and not let it take you for a ride. However, there’s often some confusion surrounding Budgets and Forecasts, they are clearly linked, but it’s important to distinguish the differences. They’re not the same and they should be used differently, as intended, to give you a different perspective of whether your business is on the road to success or not.
Written by Hannah Dawson
Why does your business even need a budget?
A Budget is where you want to go. This is your business roadmap. Remember the old days when you print off the step by step route guide instructions or use a roadmap?
Your budget is your static A-B route.
It seeks to represent a business’ financial position, cash flows and its goals by estimating the amount of future revenue and expenses that may be incurred by the company. Usually, the budget is only re-evaluated periodically, perhaps once per year, and it creates a baseline with which to compare actual results and evaluate performance. We believe it is too important to review annually so you should check it monthly to ascertain if your assumptions were correct.
Are budgets worth doing?
Most definitely! The more accurately you can predict your company’s performance, the more certain you can be that you have deployed your resources appropriately to achieve your goals. This leads nicely into the benefits of your Forecast, are you actually getting there or do you need to use a diversion?
Why do I need a forecast too?
The key difference between a business budget and a business forecast is that the budget is a plan for where a business wants to go, while a forecast indicates where it is actually going.
If the budget is your static roadmap, then your Forecast is your Sat Nav.
It is responsive to change, and should be referred to and amended at least weekly, so that you can plan confidently.
If your business is going off-track, the Forecast allows you to plan around the diversion and take a new route. Forecasts estimate by looking back at any historical data that you have, but this should be frequently updated to take into account what is happening in the business right now. So even if you are a new startup and you don’t have lots of historical data, you need to start thinking about using Forecasts, because actually, it’s the most recent data that is the most relevant to keep you on track. That’s why Futrli pulls in data from the cloud automatically, every day, to power your rolling Forecasts. Firstly, this means you don’t have to because we know if you did it is one of those tasks that would probably fall off the list. There are opportunities to grab with both hands or fires to put out which will come first. Secondly, by automating the hard part for you, it means you will have consistent access to the most up-to-date view of your business so that you can make better decisions based on the facts. And, of course, share that back with your team who need to know the numbers too.
How best to start?
You are in the right place, but don’t leave the creation of your annual budget or working forecast to the end of the year. Keep regularly updating it weekly or at least on a month-by-month basis, making sure to adjust predictions if you have new information this week that you just weren’t aware of last week.
You should always be thinking of:
- an outline of changes that you want to make to your business
- potential changes to your market, customers and competition
- your objectives and goals for the year
- your key performance indicators
- any issues or problems
- any operational changes
- information about your management and people
- your financial performance and forecasts
- details of investment in the business
Plan for every outcome – Scenarios
Create several Forecasts to reflect a range of outlooks (optimistic, pessimistic and most likely). For example, what will happen if that major investment you’re waiting on fails to materialise? How will you leverage a sudden spike in sales? Preparing yourself for a number of eventualities means that you’re able to move decisively and capitalise on, or mitigate, whatever life wants to throw at you.
Make it part of your routine!
Things can change so fast and a month is a really long time in business. If you don’t prioritise looking at your business, an amazing opportunity to pounce on the hottest trend could easily just pass you by.
Don’t be an Island
Try to keep your managers and other key members of your team involved in the Forecasting process as much as possible. They are on the front line and the information they have is more valuable than your assumptions.
While Budgeting and Forecasting are different functions, they are inextricably linked, and a decent Forecast will help create a sound Budget. Budgeting essentially lays out a plan for where a business wants to go, whereas financial Forecasting indicates where the business is actually headed. So let’s get you started!