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Budgeting and Forecasting are two important constituents of managerial decision making process. Even though both of these functions are distinct and are not same but their use and their dependency on each other make them inseparable and thus many confuse the two as same and use them interchangeably. Let’s understand the technical difference between these two.
Budgeting is a process of monetizing the plan and giving the plan an understandable structure. Budgeting provides us an outlook about the expected end results based on what has been planned or established. Most of the time budgets are based on standard costs and revenues which management establish before the task is executed. So, we can say that budgeting is a process of monetizing standard plan.
Forecast on the other hand is the expected end results based on the latest experience and circumstances at hand. Forecast enables management to predict the results by adjusting their existing plans according to the latest information. As circumstances are seldom static and thus can change over time and things might be different from what they were initially planned. Therefore, forecast helps management to adjust its plan accordingly and it is forecasting that pushes management to adjust the standards for a relevant range of time based on latest information.
Let’s understand the difference with an example.
At the start of a financial period, company expected to produce200,000 units at the end of first quarter. Information gathered at the end of first month in the quarter revealed that labour’s learning rate was faster than expected and thus they have became more efficient and effective. If process keeps its current pace as experienced in first month then it is expected that at the end of quarter output will be230,000.
In this example200,000 is the budgeted figure. This is the amount which management established before starting production. During the production process however based on month end information it is predicted that output will be230,000. This is the forecast amount which has been ‘forecasted’ based on the latest information. And now this forecast will be used to prepare a revised budget to see its effects on different aspects.
Now a days budgets are prepared on run-time basis and thus incorporating the effect almost absolutely when things change from standards. Therefore, dividing the two process now is a hard thing to do as they are closely connected with each other.
the budget is a business plan expressed in quantitative terms used for planing and control, while the forecasting is the base of preparing the budget through the forcasting techniques
In essence, a budget is a quantified expectation for what a business wants to achieve. Its characteristics are:
Conversely, a forecast is an estimate of what will actually be achieved. Its characteristics are:
Budget in a simple term is a systematic plan layout of all the revenues and expenses that is generated / required to achieve a set objective (Target) of the organization. Forecast is prediction wheather we would Achieve or Fall short or surpass the set objectives (Targets) of the organization based on the actual current situations and they also help us to adjust our plans in accordance of current situations so as to achieve the set objectives.
Difference between Budget and Forecast: when agreed on a financial objectives ,in this case the budget should be set , the budget must reflect the overall plan, forecast is an expectation of what will happen with figures projected while monitoring the budget performance f.e sale , related cost in addition to profit and loss
Budgeting - documents how the overall plan will be executed month to month, specifying expenditures.
Forecasting - uses accumulated historical data to predict financial outcomes for future months or years.
A budget is a list of all planned expenses and revenues. It is a plan for saving and spending. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in monetary terms.
Knowing where your money is being spent and what revenue is expected to come in are two important aspects of running a successful business. An annual budget provides a record of expenses and profits so you are able to plan ahead. A forecast predicts future earnings through the sale of your products or services. Each is a financial tool that helps you maintain control over your business.
The general difference between Budget and forecast is the TIMING. Budget is prepared once a year based on past performance and expected incremental business. While forecasting is done every month/quarter taking into consideration the actual business performance in the previous month/quarter and latest improvement or developments (such as new porjects, unexpected cost or one off revenues, etc)
Budget is made on the basis of past trends. Whereas, forecasting is made upon hypothetical projection.
Budget is a financial or quantitative statement, prepared prior to aspecified accounting period, containing the plans and policies to be pursued during that period. It is used as the basis for bdgetary control.
Forecast is the projection of future earnings to be realized through sales of the company's products..
