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Difference Between Budgeting and Forecasting

Budgeting vs Forecasting

Budgeting and forecasting are two activities that are often used in sales and in the overall business environment.  Although both deal with money management and are part of business management, budgeting and forecasting are two completely different activities and should not be used interchangeably.

Budgeting

Budgeting aims to determine the expenses of the company by providing a gauge or reference point so the company does not overspend and yet enable it to do other crucial business activities. It takes the form of a spreadsheet showing a detailed accounting of expenses in a given period. Specifically, it involves recording of expenses, funds, and expected profits to serve as a reference for future planning, assessment, and other functions.

Budgeting is ideally done annually, although in some cases it can be done weekly, monthly, or quarterly depending on the nature of the business. It can lead to future savings or spending depending on the figures presented. Needless to say, contingency plans (such as alternative sources of funds or anticipated income) may be developed during this process.
Budgeting is of different types categorized according to function and the context where it is used. It includes business budgeting, family budgeting, and personal budgeting.

Forecasting

Forecasting, on the other hand, is the act of predicting the trends and future activity in a certain industry or company. Usually, forecasting involves potential or expected revenue or the origin of the said revenue. Forecasting helps in budgeting by providing the expected amount for the actual budget. Based on the forecasted information, people then are able to take the necessary actions to maintain or increase productivity.

Forecasting involves comparing data and making alternative scenarios. External and internal factors may affect the forecast, thus it is important to take into consideration the company’s financial condition, status in the industry, and many other things.

Unlike budgeting that is usually done annually, forecasting may be done more frequently. But like budgeting, it takes the form of a spreadsheet or a written report consisting of predictions, movements, and recommendations.

Forecasting can fall under different types: qualitative, quantitative, explanatory, and time-based methods.

To put it simply, budgeting defines the financial target while forecasting banks on a prediction of future performance with respect to historical and contemporary status of effort.

Summary:

  1. Budgeting and forecasting are two different but related business activities that a company does in a given time. Both activities are considered internal tools that work together within an organization. The two activities are usually part of the management and operations of a certain business.
  2. Budgeting is the practice of assessing the company’s money and its future revenues. It usually entails calculating the current company funds, the expected income, and the expenses. On the other hand, forecasting is the practice of predicting where the expected revenue will come from and if there is a need to raise efforts to accomplish a certain target.
  3. Budgeting has a formula, and it usually involves money and financial terms like cash, expenses, and funds. Forecasting also involves money to a certain degree, but it does not require a formula with reports usually done in a narrative manner. In forecasting, there is also the issue of effort and manpower to create the necessary revenue or to maintain current efforts set at a particular revenue target.
  4. Budgeting determines the amount of money in the company and what appropriate actions need to be taken under the circumstances. It is often presented in a spreadsheet form. Forecasting, meanwhile, determines if the effort is enough or not. A forecast is often seen as spreadsheet or as a written report.

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