This series covers the frequently asked questions on financial forecasting. If you’re new, you can check out all other articles in this series here.
In this edition of Forecasting Fundamentals we’re tackling a common misconception. The difference between a budget and a forecast.
You’d be forgiven thinking these are the same, they’re pretty similar, but there are some key differences that make them their own unique beasts.
A budget is an expectation of a company’s financial position for a financial period (usually a year). It outlines business goals and how much cash you’ll aim to spend and receive. This helps define the allocation of cash across the business for each year.
A budget tends to only be updated once a year, before the start of a financial period.
A financial forecast makes a prediction about how your business will perform over the course of several months or years, for example:
A SaaS startup business has forecasted that they’ll turn a profit in year 3, after securing a second round of funding in year 2 to hire more staff.
Forecasts are more flexible than budgets and can be updated regularly (bi-weekly, monthly), to help keep you on track towards your goals.
The differences between a budget and a forecast
We’ve taken a quick look at what each of these mean in the opening sentences above, but there’s more to budgets and forecasts than these brief snapshots.
In essence, the difference between a budget and forecast is their usage across the business.
A budget is a plan that a business sets out once per year and is more of a goal, where the business wants to be, rather than an expectation of where they might be.
A forecast is more of a strategic tool to guide you through the months and years. It helps you steer back on course if things start to stray from the path you defined with the budget.
It’s also important to note that a forecast will tend to span several years, whereas a budget often looks at just the financial year ahead, at the end of which the company will set a new budget.
So do you need a budget or a forecast?
In short, both!
Whilst some companies will have a budget but not a forecast, or vice versa, it’s actually a really good idea to have both.
This is because, whilst they can work standalone, they’re really useful to have together.
We always encourage businesses to have a minimum of 3-year forecasts, to help you strategically plan for the future. You should revisit this forecast every month at a minimum, and tweak it according to internal and external changes, doing this helps keep you on track towards your goals.
Your forecast can then help define your budget.
For example, the sales forecast you make when creating a financial forecast can be used to help set your company budget for the year, i.e you might have forecasted that by the end of the financial year you’d have 250k in revenue, so you can use this figure to help allocate cash around the business.
The long and short of this is that using both in tandem with each other can help drive your business’ long term goals and strategic vision of the future.
So, let’s wrap up this whistle-stop tour of budgets and forecasts.
A budget is an expectation of a company’s financial position for a financial period (usually a year) whereas a forecast is more about making predictions about performance and strategising your business decisions over the course of several months and years.
Both are useful tools in your business’ strategic arsenal, but have some key differences.
Mostly it’s their usage in the business that sets them apart.
Despite being fairly similar at first glance, the two can’t be used interchangeably but rather should be together to help your business achieve its long term goals and strategy.