Budgeting vs forecasting is a good way to understand how the current financial position of a company contribute to determining its long term strategy. It is the process of allocating resources to meet the company’s strategic objectives in response to ever-changing circumstances.
A budget is a detailed financial outline of the business’s activity over a period of time. The budget will include information about the company’s revenues, expenses, cash flow, and financial position.
The budgeting process is varied and dependent on the size of the company. It usually takes longer for a big company to complete this process as it must gather input from its some functional departments. Some organizations may go further in this process by having a continuous budget in response to changing business conditions.
A forecast is a projection of expected business’s performance. It can use historical data, external industry and market indicators, to predict what will happen to a company in financial terms over a period of time.
Forecasts can be done over flexible time horizons. A long-term forecast will provide valuable output to the strategic management whereas short term forecast generally is done for daily operations.
While there are different functions in budgeting and forecasting, they are not mutually exclusive. A good forecast actually feeds a sound budget development. Comparing the latest forecast with the budget for the remainder of the period during the year can help the company make the necessary adjustments to meet changing business conditions.