You’re creating a financial plan for your business. What’s the difference between a budget and a forecast?

1 What is a budget?

A budget is a detailed plan of your expected income and expenses for a specific period, usually a year. A budget helps you set goals, allocate resources, and control your spending. A budget is based on historical data, current trends, and assumptions about the future. A budget is usually fixed and approved at the beginning of the year, and it serves as a baseline for measuring your performance.

2 What is a forecast?

A forecast is an estimate of your actual income and expenses for a specific period, usually a month or a quarter. A forecast helps you adjust to changing conditions, identify opportunities and risks, and make informed decisions. A forecast is based on the most recent data, current events, and scenarios about the future. A forecast is usually flexible and updated regularly, and it serves as a guide for taking action.

3 How do they differ?

The main difference between a budget and a forecast is the level of detail and accuracy. A budget is more detailed and precise, as it covers every aspect of your financial plan. A forecast is more general and approximate, as it focuses on the key drivers of your financial performance. A budget is also more static and rigid, as it reflects your original plan. A forecast is more dynamic and adaptable, as it reflects your current situation.

4 How do they complement each other?

A budget and a forecast are not mutually exclusive, but rather complementary tools for financial management. A budget gives you a clear vision of your desired outcomes, while a forecast gives you a realistic view of your actual results. By comparing your budget and your forecast, you can identify the gaps and variances between your plan and your reality. This can help you evaluate your progress, identify the root causes of any issues, and take corrective actions if needed.

5 How do you create a budget and a forecast?

To create a budget and a forecast, you need to follow some basic steps. First, you need to collect and analyze your historical data, such as your revenue, expenses, cash flow, and profitability. This can help you understand your past performance and trends. Second, you need to define your assumptions and scenarios, such as your growth rate, market share, inflation, and competition. This can help you project your future performance and risks. Third, you need to set your goals and allocate your resources, such as your sales targets, cost reduction, and investments. This can help you plan your actions and strategies. Fourth, you need to monitor and update your data, such as your actual revenue, expenses, cash flow, and profitability. This can help you adjust your assumptions and scenarios, and revise your goals and resources if needed.

6 How do you use a budget and a forecast?

To use a budget and a forecast effectively, you need to follow some best practices. First, you need to align your budget and your forecast with your strategic objectives and priorities. This can help you ensure that your financial plan supports your business vision and mission. Second, you need to communicate your budget and your forecast clearly and regularly to your stakeholders, such as your team, your managers, and your investors. This can help you gain their buy-in, feedback, and support. Third, you need to review your budget and your forecast periodically and systematically, such as monthly, quarterly, and annually. This can help you track your performance, identify any deviations, and take any necessary actions.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?