Budgeting and financial forecasting-a tool that companies use to create a plan where the leadership wants to take the company and whether it is in the right direction. Although the financial forecasting and budgeting are often used together, there are clear differences between the two.
Budgeting reflects the expectation of revenue that the business wants to achieve for the future, while assessing the financial forecasting the amount of revenues that will be achieved. In other words, budgeting outlines a plan where the management wants to take the company, while financial projections, indicates whether the company is moving in the right direction.
A budget is a plan of hope for what the company wants to achieve over a certain period, usually one year. Some of the features of budgeting include:
- Estimates of income and expenditure for the year
- Expected cash flows
- The expected debt reduction,
- Budget compared to actual results, to calculate the difference between the two.
Budgeting is the company’s financial position, cash flows and goals. The company’s budget is usually reviewed periodically, typically once during the financial year, depending on how the user wants to update the information. Budgeting creates a basis for comparison of actual results to determine how results differ from expected performance.
Most budgets are carried out throughout the year, but it’s not a hard and fast rule. For some companies, management must be flexible and allow the budget will be adjusted during the year as business conditions change.
Financial projections estimates of the company’s future financial performance by studying historical data. Financial forecasting allows you to predict the outcome of the management teams based on previous financial data. Financial prediction characteristics include:
- Businesses use financial forecasting to determine how they should allocate their budgets for the next period. Unlike budgeting, financial forecasting, analyze the variance between financial forecasts and actual performance.
- Financial forecasts are updated regularly, perhaps once a month or quarterly, when you change the operations, inventory, and business plan.
- Predictions can be both short-term and long-term. For example, a company may have a quarterly revenue forecasts. Also, if a customer is lost to competition, the revenue projections may need to be updated.
- The management team can use a financial forecast and to take urgent measures based on forecast data.
Forecasts can help management to make adjustments in production and inventories. In addition, long-term forecast can help guide businesses to develop a business plan.
A budget is a plan where the management wants to take the company. The financial forecast is a statement indicating whether the company is to in your budget or not, and where the company is headed.
Budgeting can sometimes contain objectives that cannot be achieved as a result of changes in market conditions. If a company uses budgeting and make decisions, the budget should be flexible and updated more often than one fiscal year, so there is some relationship to the market.
Budget and financial projections, should work in tandem with each other. For example, the forecasts in the short and long term can be used to create and update a budget.