Tearing your hair out trying to figure out the difference between budgeting and forecasting, and wondering why on earth you need both when one’s bad enough to manage? Fret no more and leave those tresses alone – we’ve broken them down to the nuts and bolts of what they are and when to use them. 

No, a budget isn’t a type of bird! Budgeting is an absolutely necessary component for any business large or small, new or old. It doesn’t have to be a stumbling block, instead it’s a useful tool, like, say Google maps, to keep us going in the right direction. Yes, it’s tempting to steer off track – who doesn’t love a little detour? But if you want to get to your destination, i.e. not overspend, then a budget is your map to stay on course.

Put simply, your budget is determined at the start of the fiscal year and is based on previous results. It considers your goals for the year and what direction you want to go. It’s important to check in with your budget every month to ensure your spending is within the parameter of what you set. Your budget should stand firm, nothing but something extraordinary should budge it. Ah, hello COVID, you extraordinary beast… Pandemics, along with recessions, expansions, contractions and so on are the exceptions to the rule.

A budgeting for small businesses, or even large, is usually a team effort. Sticking with the Google maps analogy for a moment; you review last year’s trip and you’d like to shake things up this year. The family outlines what they’d like to see and how much time each stop would add to the journey. You can budget what gas you need for the journey and arrange the route based on this info. To go off the map might result in an empty tank half way and no money to fill it. And so it is in business; the budget keeps the business running smoothly and getting to where you want it to go. Management and executive compensation is often based on the budget.

Budgeting services might be a good avenue for you to explore if you are hesitant on your ability to plan and adhere appropriately. Luckily, we know some cool cats ready to help, just head over to our CFO services page for more information.

Forecasting on the other hand is based on probable future events and although less collaborative, still relies on key groups like sales and marketing. It is usually reset monthly, but can be done more or less, whenever the business needs. They are typically used for employee commissions for retail B2C environments to drive performance. Forecasting provides a clearer picture of where you are headed – likely above or below the budget but rarely aligned with it, especially in fast growing companies.

If budgeting is Google maps, forecasting is that voice that directs you where to go. It takes into consideration traffic, diversions etc. Monthly forecasting reports are key in alerting management of potential issues down the line, especially regarding profit or cash. When you have a solid forecast in place, you can run scenarios to test prospective decisions. Comparing the two forecasts shows the impact of said decision.

Before you start off on your journey, keep in mind a couple of things. It’s best practice to do three way budgeting and three way forecasting (P&L, Balance Sheet and Cashflow) so that it is clear how the results will affect all aspects of the business, not just profit. Remember to document how you came to the figures in your budget or forecast – it’s important the users understand the drivers and assumptions behind the numbers. And lastly, just get started. The trip will be more enjoyable when you’ve planned your route and know where it is you’re going. An application is better to use for both rather than excel. Many apps connect to your accounting software and provide high quality data. Updating actuals on a monthly basis requires less effort and ensures that your three way budgets and forecasts are accurate.

Once you’ve done the groundwork with your budget and forecasting, all that’s left for you to do is drive on and enjoy the views!

We recommend these links to financial reporting software that can aid with all your forecasting and budgeting needs: