Budget Versus Forecast: What Your Business Needs to Know

“Our business has a budget. Why do we need a forecast, too?”

While budgets and forecasts are both important tools for your business, they don’t serve the same purpose. Having one doesn’t mean that the other isn’t needed. Ultimately, your budget will do more for your business if a forecast is also being used to gauge your business’s current cash position.

Let’s dive into how a budget and a forecast differ, and how you can leverage both to improve your business’s financial planning.

Budget vs. Forecast

A budget is a business’s financial roadmap. It’s basically the business plan for how income and expenses will be used over a set period of time. That’s why most businesses will set a budget for the next year and determine how money will be used. Common entries in a business budget would be office rent, marketing expenses, department travel, and other operational costs. Having a well-planned budget makes sure that spending stays within a predetermined range. Unexpected spending can impact business goals after all.

I often compare a budget to a paper map that is prepared in advance of your trip. It’s a step-by-step guide of how to reach your destination. This roadmap may not have new information that has recently become available such as road construction and detours to expect. Or, maybe it doesn’t include a new highway that has been built since you purchased your roadmap atlas (does anyone else remember those?).

Cash flow forecasting, on the other hand, is all about anticipating future obstacles and opportunities. Basically, you use historical data and current trends to plan for future financial outcomes. Ultimately, cash flow forecasting helps you prepare for uncertainties and make informed, strategic decisions as new information becomes available.

If a budget is a roadmap, forecasting is a bit more like a modern GPS. It adjusts with you while you’re on the road and will account for obstacles such as highway closures.

Whatever obstacle (or opportunity) might come your way – for example, if your business foresees an increase in client referrals or a recession – forecasting helps you plan for these scenarios, adjusting your business strategies as needed.

Key Differences Between Budgeting and Forecasting

Time Frame

Budgeting: A budget gives a quick look at your expected financial situation, based on projected income and expenses, and typically covers a set time frame, like a fiscal year.

Forecasting: A forecast provides an ongoing, flexible view of potential outcomes over the coming months or years, and is regularly updated to account for obstacles, opportunities, and trends.

Purpose

Budgeting: Establishes clear financial goals and limits, focusing on managing costs and staying within the defined budget.

Forecasting: Focuses on predicting financial outcomes and identifying potential shifts. It's all about real-time planning and adapting to changing market conditions.

How Budgets and Forecasts Are Used Together

Budgets and forecasts are designed to be used together to give you a clearer vision of your business’s financial health. Here’s how budgets and forecasts work together for small and midsize businesses:

Set the Budget: Every journey begins with a destination. Creating a comprehensive annual budget that details how you intend to allocate your business's projected income and manage future expenses provides a clear vision of your goals.
Forecast for Adjustments: Your forecast compares projected and actual results. If client referrals are coming in far quicker than expected, you might predict higher revenue and choose to hire more staff to accommodate upcoming work. Conversely, if your sales pipeline is not performing as well as expected, you might project lower income and find where expenses can be cut.
Review and Adapt: A forecast is designed to be reviewed regularly. This allows you to keep your eye on your current cash position and know how and when to adjust strategies to avoid obstacles. You might discover that now is the time to find more clients, trim expenses, or better leveraging your staff or tools.

However, there may be times when you need to adjust your destination along the way. If your progress indicates you're significantly off track from your goals, it's worth considering a course correction to ensure the remainder of the year remains productive. After all, no one wants to pursue an unachievable target.

Tips for Productive Forecasting

Leverage modeling to create multiple forecasts: Once your forecast is set, one of its key advantages is the ability to model different scenarios. The strength of forecasting lies in its flexibility. We suggest developing multiple versions – best-case, likely, and worst-case – to prepare for various outcomes and plan accordingly. This approach helps you avoid making major decisions on the spot, especially when it comes to your team. Forecasting provides the framework to anticipate when you may need to adjust staffing levels -- whether it's growing, maintaining, or reducing headcount -- based on how things unfold.
Make forecasting a team effort: While you might prefer just one co-pilot on a road trip, forecasting benefits from multiple perspectives. When we conduct forecasting meetings with our clients, we ensure that the most current information, such as pipeline data, is included to achieve the highest possible accuracy in sales projections.
Treat ‘misses’ as learning opportunities: When you realize your forecast needs to be adjusted downward, it can be tempting to overlook it, hoping for better financial performance next month. However, this is the perfect time to dig into the details and uncover any insights from the ‘miss.’ By identifying discrepancies, you can determine if you're dealing with a market downturn, an isolated bad month, a process that needs adjustment, or pricing issues. A missed forecast can serve as a valuable diagnostic tool to help get things back on track.

Do you need more help creating an effective forecast? Check out our virtual CFO services or schedule a consultation below.