Budgeting and forecasting are related, but they play different roles in business. In a nutshell, a budget is a step-by-step spending plan, while a forecast is an estimation of an outcome. Both have an important role to play in taking control of your business and preparing for the future, so let’s dive deeper into the key differences between the two tools.
What is Budgeting?
Budgeting is a detailed spending plan for the future. It’s used to provide financial direction while making sure you can meet your business goals and objectives. In other words, it controls what happens in your day-to-day operations by influencing how much money goes into different areas of the business, such as marketing and human resources.
Different Types of Budgets
There are two types of budgets: operational and capital. An operational budget is used to control your day-to-day operations, while a capital budget focuses on major purchases or investments in the business. For example, an annual marketing campaign will probably fall into the capital category because it’s something you do once per year instead of on a daily or weekly basis.
Budgeting techniques are used to determine how much you’ll spend in different areas of the business, such as sales and marketing. There are many types of budgeting techniques, including:
- Zero-based budgeting, where all expenses for a period must be justified.
- Percentage of sales budgeting, where a certain percentage of your total revenue is set aside for spending.
- Value proposition budgeting, where you allocate resources based on the value each budget item brings to your business.
- Surplus budgeting, where the total revenue is greater than the total expenses.
- Gap budgeting, which identifies gaps between goals and actual performance levels in different areas of your business.
How to Prepare a Budget
In order to prepare a basic budget for your business, you need to calculate your total revenue for the period you’re looking at.
Then, calculate your fixed and variable expenses. You should also factor in any planned purchases or investments over a set timeframe, as well as expected changes to your overall business strategy.
Subtract your expenses from your income and then create a tax estimate. The final figure will be the profit that you have to invest in your business.
What is Forecasting?
Forecasting helps you create a plan for the future. It’s used to predict if your business will meet its financial goals, and is most commonly employed by growth companies that want to provide investors with an idea of their expected revenue. Forecasts are often related to quantitative data like sales forecasts or cost projections, but they can be based on qualitative data as well.
The key difference between budgets and forecasts is that budgets are effective in the short-term, while forecasting works best over a longer period.
Qualitative vs Quantitative Forecasting
There are two main types of forecasting: qualitative and quantitative. A qualitative forecast is based on expert opinion, while a quantitative forecast uses hard data to produce numerical forecasts like sales projections.
How to Prepare a Forecast
In order to prepare a forecast for your business, you’ll need to list all of the assumptions that underpin it. This includes things like expected sales growth and any major changes in the market or economy over a certain timeframe. You should also factor in variables such as pricing models, competitor activity and customer behavior into your quantitative forecasts.
The Key Difference
In conclusion, budgeting helps you control your daily operations, while forecasting is a tool for predicting future performance. A budget is used to set limits on your spending, while a forecast is used to predict whether or not your business will meet its goals. Both are important tools for business performance and growth, and thus should be taken seriously.