Budgeting
Budgeting is allocating funds towards known and expected costs. The business measures its expected cash flow and budgets how best to spend its scarce resources. Companies do not allocate money without knowing the cost first. For example, a company does not record on its books three separate possible prices for a software program: Instead, it will choose a program and record its known cost in the budget. Budgeting also entails strategy and decision-making: A restaurant manager may have to choose between hiring two new busboys and upgrading its reservation system as part of its budgeting process.
Forecasting
Forecasting is an attempt to anticipate future events based on current and unexpected circumstances. Businesses forecast expected sales, the financial impact from competitors and anticipated costs of materials. Companies forecast as a way to gain a competitive advantage. If, for example, a car company can preempt hikes in the price of steel in the U.S. it may switch to a foreign vendor and lock in a low price. The forecasting process entails compiling past and present data as well as specific variables into a statistical tool and measuring the expected results. A business desiring to know its expected fourth quarter profit, for instance, may compile the previous year's and quarter's sales data, competitor information, expected changes in price and other factors into a program. From there, the information reveals possible trends.
