Financial Forecasting vs Budgeting: What's the Difference?

July 31, 2023

Forecasting and budgets are fundamental for managing money, but recent surveys report 46% of small businesses don't have a budget and 30% are using forecasts for current financial plans instead of future projections.

Most of these setbacks are due to the confusion about how forecasts and budgets fit into financial planning. This article explains the differences between budgeting and financial forecasting with examples of each to help make everything stick. 

What Is Forecasting?

Forecasting is a process used to estimate a company's future financial performance for revenue growth, conversion rates, sales volume, and expenses. Forecasts are usually updated annually or quarterly to account for any changes in market conditions or revenue goals.

These projected outcomes (forecasts) can help predict short-term or long-term results. For instance, companies can use Q1 sales and revenue forecasts to adjust predictions for Q2. If annual revenue has to increase by 10%, financial forecasts can determine how much monthly revenue growth is required to hit the 10% increase.  

Types of Forecasts 

When it comes to predicting future financial performance, companies generally use three types of forecasts: general, sales, and financial forecasts. Each forecast serves a specific purpose, even though there's naturally some overlap between financial reports and data used for predictions.

Financial Forecasts 

Financial forecasts provide high-level future financial positions. These forecasts focus on data for cash flow, income statements, balance sheets, sales revenue, and competitor earnings.

Sales Forecasts 

Sales forecasts predict the future sales revenue of a company. These forecasts cover the number of products and services expected to sell, production costs, and potential profits.

General Forecasts 

General forecasts are broad predictions about overall financial performance, like project revenue and expenses, market trends, and product or service demand.

Sub-Forecasts  

In addition to these main types of forecasts, there are several sub-forecasts used for more granular financial projections:

  • Compensation forecasts predict expenses for salaries, benefits, bonuses, and taxes.
  • Platform spend forecasts estimate the total spend on software and IT infrastructure.
  • Marketing spend forecasts predict the investment required for paid campaigns.
  • Revenue model forecasts estimate income stream returns from different revenue sources.

Forecasting all revenue and expenses can be daunting. These sub-forecasts can help break up the bigger financial picture into smaller, more manageable assumptions.

What Is Budgeting?

Budgeting is the process of planning and tracking a company's finances. Simply put, budgeting involves creating a financial plan to allocate resources over a specific time period. This plan includes estimates of revenues and expenses, as well as cash inflows and outflows.

Budgets are typically prepared once a year and remain relatively static aside from quarterly or semi-annual updates. During these reviews, companies compare budget estimates with actual numbers and adjust as needed to control expenses and maximize profit margins.

Types of Budgets 

Because of their static nature, budgets are generally used for focused, well-defined, short-term initiatives. There are five types of budgets companies typically produce to monitor and manage expenses.

Static Budgets 

Static budgets include fixed expenses for each department. These budgets remain unchanged even if there are fluctuations in sales volume and production levels.

Master Budgets 

Master budgets cover all departments across a company. These budgets include revenue, expenses, operating costs, sales, capital expenditures, and other items on financial statements.

Financial Budgets 

Financial budgets are created for strategically managing assets, cash flow, income, and expenses. These budgets are generally used for mergers and acquisitions or when a company is going public.

Operating Budgets 

Operating budgets predict revenue and expenses from daily operations. These budgets include cost of goods sold (COGS), sales, as well as general and administrative expenses.

Cash Flow Budgets 

Cash flow budgets monitor cash position and identify potential shortages. These budgets focus primarily on cash inflows and expenditures over a certain period of time. 

Key Differences Between Forecast vs Budget

Financial forecasting and budgeting are essential financial planning tools for companies of all shapes and sizes. These two terms are often used interchangeably, but there are major differences between budget and forecast methodologies, outcomes, and uses.

Purpose 

Forecasting aims to predict future outcomes based on past performance, market trends, and economic conditions. These financial projections provide insights into future cash flow, revenue, and expenses. Companies can use these forecasts for operational planning and adjustments.

Budgets are more of a tactical plan to allocate resources and control spending. They provide a detailed outline of income and expenses over a specific period, typically focusing on short-term financial management. These guidelines help companies keep an eye on cash flow.

Timeframe 

Financial forecasting typically covers a broader timeframe over one, three, or five years. Some projections are generated monthly, quarterly, and semi-annually. Forecast schedules will depend on individual business goals and growth stages.

Budgets are created for a specific period, which is usually one year. Time frames can range from 3-6 months for smaller companies to 2-3 years for larger corporations. Regular budgets are conducted monthly, quarterly, or semi-annually.

Detail 

Financial forecasts offer a broader outlook on future finances. They focus on high-level predictions and trends instead of diving into double-entry accounting and resource allocation. Forecasts may not be as detailed as budgets, but they're useful for strategic decisions and identifying potential risks. 

Budgets include more details, breaking down income and expenses into various categories. Each transaction on a budget spreadsheet is an individual line item that corresponds to a specific expense category. This level of detail makes it easy to see how much money is being spent and where it's going.

Flexibility 

Financial forecasts can be revised as new information comes in. Companies can make quick adjustments to reflect new financial goals, market trends, or scaling operations. This makes forecasts more flexible for responding to changing circumstances compared to budgets.

Budgets are more static, serving as a benchmark to compare actual performance. Once prepared, budgets are the primary resource for financial decision-making. Any deviations from a budget will often require approval from a manager or senior-level executive.

Usage 

Financial forecasting plays an important role in setting financial objectives and making informed decisions about investments and spending. They can also be used to monitor performance against budget figures or as a presentation for investors and lenders.

Budgets reveal the financial direction of a company. They're mainly used as a financial planner and expense tracker to monitor and manage spending controls. Forecasts can serve as inputs for budgets to set financial targets and allocate resources.

How to Prepare a Forecast vs Budget

Preparing forecasts and budgets both start with financial reports for income, cash flow, expenses, and revenue. Budgets use this data to determine revenue and expense targets, whereas forecasts analyze reports for long-term financial strategies.

Both tools are essential for driving business growth but making sense of financial figures is often easier said than done. Fractional Financial Analysts can turn financial reports into valuable insights. They work on a part-time or project basis for a fraction of the cost of a full-time hire.

Book a free consultation with one of our finance experts to learn more about how a Fractional Financial Analyst can help get the financial reports and insights you need to make strategic decisions. 

Alyssa Huizenga
Director, Business Development
[email protected]

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