Budgeting vs. forecasting: what’s the difference? Is there a difference?
Undoubtedly, yes. Budgets and forecasts are two related but different tools used by Finance teams to manage revenue and drive company growth. Knowing the differences between the two and understanding how to use them is essential to running a successful business.
That said, there is a surprising amount of confusion around budgeting vs. forecasting. Perhaps driven by modern software tools that centralize Accounting and Finance data, many business owners and finance professionals fail to effectively separate budgets and forecasts and use them to their full strategic potential.
This article will walk you through the definition of both budgets and forecasts, the purpose each serves for business, and 4 key differences between the two.
Budgeting and Forecasting Differences
Forecasts are one of the most important tools for setting accurate and realistic budgets. This means there are some inherent differences between forecasting and budgeting. Here are a few key differences to keep in mind:
- Budgets are a detailed financial plan for the future that outline goals and expectations
- Budgets are more fixed in nature
- Budgets are best used as a goal-setting framework and a reference point for performance analysis.
- Forecasts are informed predictions based on historical data and AI-driven analytics
- Forecasts are flexible and evolve with internal and external changes
- Forecasts are better used for real-time strategic decision making
- Forecasts help set accurate and realistic budgets
What is Budgeting?
A budget is a detailed financial plan for a fixed future period of time, typically one year. Budgets set baseline expectations and goals for the coming year, providing a clear reference point from which business leaders can evaluate actual performance and progress. They typically include an outline of expected revenue and expenses, as well as goals for reducing debt and growing profit.
Examples of common business budget fields include:
- Fixed expenses
- Variable expenses
- Sales Revenue
- Other Revenue
Budgets are fairly static, although their level of fixedness can vary depending on the business, its maturity, and the state of the current market. For example, a growing startup may create an annual budget, but choose to reassess and update it quarterly given the rapidity with which their financial state can change.
An established large enterprise, on the other hand, will likely have a similar budget each year with small changes made annually so that it evolves as needed.
What is Forecasting?
A forecast is an informed prediction of a company’s future financial state, driven by both historical data and predictive analytics. The latter is a newer capability driven by big data and AI technology, but it’s one that’s quickly becoming a competitive imperative in today’s fast-changing business environment.
Forecasts include many of the same data points as budgets (expenses, revenue, profit, etc.) but focus much more on the overall trajectory of each rather than detailed line items. To demonstrate them impactfully, financial forecasting tools often utilize charts, graphs, and other data visualizations.
Unlike budgets, financial forecasts are more frequently reassessed and often even updated in real-time. They’re impacted by internal company changes (like the gain or loss of a big customer) and external market events (the pandemic is a prime example). Business leaders use forecasts to make strategic business decisions, operate with greater agility, and prepare for likely future scenarios.
Budgeting vs. Forecasting: 4 Key Differences
Much of the same data may be used in both budgets and forecasts, but the content contained in each differs. Budgets are built around goals and include granular detail around planned revenue and expenses. Forecasts, on other hand, are based on the most likely future scenarios without regard to what a company wants or plans to achieve.
As mentioned, budgets are created for a fixed period of time (usually one year). Forecasts are often developed with a longer time frame in mind — they give business leaders a picture of the next several years and can be viewed in various ways depending on the purpose behind a given analysis (i.e. immediate future forecasts vs. long-term, focus on certain KPIs, etc.).
Budgets are intentionally more fixed to provide a reliable, consistent reference point against which companies can measure financial performance. Forecasts, on the other hand, are rooted in actuals — they’re intended to provide an accurate snapshot of the likeliest future at the current time. As such, forecasts are flexible in nature and constantly evolve alongside internal and external changes.
Budgets are most strategically impactful when they’re actively used as goal-setting frameworks and performance assessment tools. When employees and managers use budgets to understand financial goals and limitations, they can align their efforts accordingly.
Forecasts are best utilized as decision making tools. When business leaders know what’s on the horizon, they can set the right strategy to succeed in that scenario. Forecasts may predict conditions over which companies have no control, but they provide the information needed to prepare for them successfully.
Budgeting and Forecasting:
Despite their clear differences, budgets and forecasts are equally important and strategically related. More specifically, forecasts are a key tool for developing accurate and realistic budgets that account for upcoming scenarios and set realistic expectations for the period ahead.
Both budgets and forecasts empower companies to navigate change effectively, capitalize on opportunities, and create revenue growth. The more actively a company uses their budgets and forecasts, the more financially healthy it will be long-term.
Xactly’s Agile Revenue Performance Management and Performance Analytics are highly automated, collaborative, and data-informed to enable organizations to set budgets and forecasts with confidence.