The Difference Between Budgeting and Forecasting — And Why They Matter
If you’ve always thought your business forecast and your business budget are one in the same, we have good news: You’re not alone.
Whether your business is big or small, it’s important to have an accurate forecast and budget. That’s because both of them work together, helping you reach your ultimate goal — financial prosperity. But while equally important, forecasts and budgets are actually two very different financial animals. A budget is a plan built to determine how you want to grow your company. It doesn’t predict what will happen, but instead outlines what you want to happen. A forecast predicts what your financials will look like months — or even years — from now. These estimates are rooted in historical data and growth rates.
Still confused? Let’s dig into some of the main differences between budgeting and forecasting — and why you should introduce them into your business plan right now.
Your business budget is a roadmap marked with your final destination. In other words, it shows where you want to go during the upcoming fiscal year — and how to get there.
Budgets are usually created and evaluated once a year. The end product will show your business’ current financial position, cash flows, and goals by estimating incurred expenses and the amount of revenue needed to stay on track and fiscally sound. Put simply, budgeting creates a benchmark so you can measure your business’ progress and performance.
Is revenue on track with the budget? Are you at risk of not meeting goals? All of these questions can be measured by frequently checking against your budget.
Here’s Why Budgeting Matters
A budget is your business plan. It maps out where you want to be in the next one, two, or even five years. Without it, it’s hard to measure success. Setting and sticking to a budget is a great way to make sure your team is always investing in the things you’ve decided will make you successful, and making real progress to that goal.
Budgeting Best Practices
Are you ready to build out your budget? Here are a few things to consider to sharpen this necessary tool:
Be realistic when projecting your future cash-flow.
Your revenue forecasts will fuel a lot of this (more to come on this later), but you can never be 100% certain that prediction will materialize. It’s usually best to be conservative.
Understand the difference between essential and non-essential expenses.
Office space rent, electricity, employee salaries? Definite must-haves. Weekly in-office La Croix deliveries and first-class business trips? Not so much.
Do your future self a favor.
Make sure you’re giving your business some cushion. Consider incorporating cash reserves into your budget so you’ll have extra profits should things get a little rocky.
Think of a forecast as the guide that helps you reach your business goals. It gives you a data-based take on where your business is actually going. This helps you effectively prepare for what’s to come and conquer any challenges head-on. And here’s where everything comes full circle: Your budget is built around these predictions, so you can rest easy knowing you’re prepared for whatever comes your way.
Here’s Why Forecasting Matters
Your forecast gives your business agility. Fueled by real-time data, a forecast grounds your predictions in reality so you can make smarter business decisions. And unlike budgets, a forecast also helps you react and adjust to change. For example, maybe you forecasted business growth on retaining that one large client. Things don’t go quite as planned and the agreement falls through. You can quickly adjust your forecast to compensate for the loss.
Forecasting Best Practices
Things can change fast. Here’s how to ensure you’re prepared for any and all scenarios:
Keep your forecasting ongoing.
When it comes to forecasts, you can’t really set it and forget it. Make sure you’re checking in with key stakeholders often and regularly forecasting to make adjustments to spending throughout the year.
Make sure you’re accounting for every possible outcome.
You can build out several forecasts to reflect a range of possible outlooks (optimistic, pessimistic and most plausible). For example, how will you handle an unexpectedly slow month in sales?
Have a plan in place for whatever outcome materializes.
With several forecasts, there are several possibilities. Make sure you’re prepared for whatever life throws at you.
Are You Ready to Set Your Business Up for Success?
While the difference between a budget and a forecast seems bigger than you might have thought, both are important elements in safeguarding your business. So what’s next? Make sure you have the right tools in place to accurately understand where your business is and where it’s going.
Consulting accountant experts is a good place to start when looking to gather the right insights. Request a demo with Digital Alternative Banking today to learn just how financial and accounting software can help you build smart budgets and forecasts.