Both financial forecasting and budgeting are essential to business strategy. Each one has a key role to play in ensuring that an enterprise is moving in the right direction. There are similarities between budgeting and financial forecasting – both make use of some of the same data, for example, – but also key differences. For any organisation, understanding the differences between the two will be key to getting the most from these essential processes.
The fundamental purpose of financial forecasting is to create a picture of the future financial position of the business using the data that is available. Financial forecasts have many uses, from attracting investors and finance through to giving management the opportunity to steer the direction of the business and monitor updates and progress. They involve estimating the future income and expenditure of an enterprise and may be used in a number of different ways, from providing data for profit and loss statements to informing the balance sheet.
Ideally, financial forecasting is done regularly (e.g. monthly) and is frequently analysed against actual performance over the previous period of time. It’s also most effective when actual market conditions are integrated into the process – changes in business conditions can make a huge difference to projected financial outcomes.
A business budget is an essential part of the process of steering an enterprise through each financial year. More of a plan than financial forecasting, budgeting involves drawing information from across the business in order to create a series of objectives that also tie in with the business’ strategic goals.
A budget is often set on an annual basis and may then provide a benchmark against which progress within the business can be measured over the course of the coming year. However, given the speed at which many industries move today, it’s often necessary for an annual budget to be revised and revisited throughout the course of the year depending on actual performance.
The importance of getting financial forecasting and budgeting right
Methods and requirements for financial forecasting and budgeting tend to vary from industry to industry. For example, in retail, weekly financial forecasts may be essential to ensure the business is on top of consumer trends and movements whereas in other commercial industries a monthly forecast would serve a similar purpose.
There are also multiple methods of budgeting and forecasting, each of which has a different purpose and process. For example, quantitative forecasting may involve applying mathematical and statistical methods to projected outcomes. Budgeting can also be done in many different ways, including incremental budgeting, which uses the previous period’s figures as a basis and creates the next budget by adjusting these either up or down.
There are many tools available to enable any business today to get the most from the data that can inform financial forecasting and budgeting. What’s important is to ensure that the resources you use can be tailored to the individual needs of your business to produce the most accurate and reliable results.