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FORECASTING
The use of historic data to determine the direction of future trends. Forecasting is used by companies to determine how to allocate their budgets for an upcoming period of time. This is typically based on demand for the goods and services it offers, compared to the cost of producing them. Investors utilize forecasting to determine if events affecting a company, such as sales expectations, will increase or decrease the price of shares in that company. Forecasting also provides an important benchmark for firms which have a long-term perspective of operations.
Estimation refers to the act or an instance of estimating. Estimation may also be defined as the amount, extent, position, size or value reached in an estimate. To estimate is to form an approximate idea of distance, size or cost. Or Estimation is the calculated approximation of a result which is usable even if input data may be incomplete or uncertain.
Forecasting is forward-looking. It is your predictions about the future quantified in numbers. Or percentages. For example, you may forecast next year's sales, market share, etc. On the other hand, estimates may be the individual figures that make up your sales forecast, for instance. Estimates may relate to things other than forecasts. For example, you may estimate the provision for doubtful debts, and include the estimate in your last year's financial statements. Likewise, you may estimate the amount of income tax to be paid to the government.
BUDGET
A budget is a plan expressed in quantitative, usually monetary term, covering a specific period of time, usually one year. In other words a budget is a systematic plan for the utilization of manpower and material resources.
In a business organization, a budget represents an estimate of future costs and revenues. Budgets may be divided into two basic classes: Capital Budgets and Operating Budgets.
Capital budgets are directed towards proposed expenditures for new projects and often require special financing. The operating budgets are directed towards achieving short-term operational goals of the organization, for instance, production or profit goals in a business firm. Operating budgets may be sub-divided into various departmental of functional budgets.
The main characteristics of a budget are:
1. It is prepared in advance and is derived from the long-term strategy of the organization.
2. It relates to future period for which objectives or goals have already been laid down.
It is expressed in quantitative form, physical or monetary units, or both.
Different types of budgets are prepared for different purposed e.g. Sales Budget, Production Budget, Administrative Expense Budget, Raw-material Budget etc. All these sectional budgets are afterwards integrated into a master budget, which represents an overall plan of the organization.
Forecasting is to analyse the past figures of a particular item (at least for5 years) and predict the expected / projected expense in the coming period to incorporate into tthe budget. Eg : Entertainment, Utilities (under this will come rent, electricity charges, etc....), Marketing expenses etc......
Budgeting is to analyse the current situation of money in hand and using the forecasted figures to divide the projected expenses for the coming period. This will give the overall idea of the projected expenses entirely.
Forecasting is predecting the future sales (DEMAND) of your product(s)/service(s) in your targeted markets in a time line (usually monthly). Different methods are used to do that, some of them use historical business data and other use expectations for external parameters such as the economy and technology. One of the outcomes of the forecast is the anticipated revenue.
Forecasting is the base for the operations plan (SUPPLY). This plan outlines how are planning to use your capacity to meet the approved anticipated demand. One of the outcomes of the operations plan is the cost of the supply (material, components, manpower, machinery, & tools) and the investments which might be required to meet the planned supply.
Budget is produced using the revenue forceasted for a period, the cost to satisfy that periods demand, the investment which might be required. These costs are classefied into departmental costs of material, consumables, manpower, and other antici[ated costs to run the business such as maintenance, & insurance.
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.
Example for better understanding is:
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 labor’s learning rate was faster than expected and thus they have become 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.
I would like to give answer in short instead of making an essay.
Forecasting is the prediction of future.
Budgeting is the planning of present according to forecasting before the task is executed.
forcasting is Qualitative Approach by using your skills and knowledge while as Budgeting is Quantitative plus qualitative Approach by using neumaric facts and figure by mixing it with your knowledge and skills
