Key Differences Between Financial Forecasting And Budgeting

Financial forecasting and budgeting are both important for business: executives and analysts look at them to chart a course for a business. Both offer the financial insights that drive decision-making, so anyone with a stake in corporate growth will keep a close eye on forecasts and budget numbers.

Financial forecasting is what some analysts would call “front-line data” that provides a foundation for other kinds of reports. It’s a direct window into what’s happening with the business in the present, and what’s likely to happen in the near future.

A budget is, in many ways, a longer-term analysis. People talk about budget numbers directing future allocations: the budget can be a ‘guide’ to what is happening financially within the business year to year. 

If you’re trying to manage a business in both short-term and long-term ways, you may be asking how these two processes are different. We’ll go into the nuts and bolts of how to perform both of these processes, financial forecasting and budgeting. We’ll cover a lot of the differences in planning roles, as well as the how-to that’s so important for busy executives and business leaders.

Analysts Use Quantitative and Qualitative Financial Forecasting 

Financial forecasting generally focuses on revenues and expenses that are direct projections of current hard numbers. A budget by contrast, is a detailed representation of financial results for a given time frame, usually a year.

Planners often use two main kinds of forecasting. One is called qualitative forecasting, and the other is called quantitative forecasting. The qualitative approach uses what some call ‘soft data’ to make projections. The quantitative approach uses actual hard data about current operations, including:

• What’s costing the business money
• Where the business is profiting at a given time
• Which departments or cost centers may be more successful than others

 Then the planners use that data to project out into future quarters. They may, for example, see a spike in sales. Then, looking at longer-term data, stakeholders can consider whether the evidence shows that the increased levels will continue, or whether it’s more likely that the sales spike is a fluke and that sales will return to prior levels. The same type of analysis helps with expenses, too. Forecasting and budgeting can show where higher prices or other factors require a business response.

Financial Forecasts Updated Quarterly, Budgets Updated Annually

Financial forecasts tend to be updated monthly or quarterly. Budgets are updated once a year, and leadership often spends a lot of time looking at an annual budget throughout that year. In that way, the annual budget keeps driving long-term progress, but doesn’t provide for short-term changes in projections – it’s an annual document in most companies and offices.

The forecast, on the other hand, is something that does get updated more frequently, and changes with time. That’s one reason that leaders are less likely to use forecasting to chart a course for business, and more likely to use a developed annual budget.

Financial Forecasts and Budgets – Impact on Operations

Think about this in evaluating a forecasting and budgeting process:=financial forecasts provide a sort of short-term steering for analysis. They don’t often directly impact things like performance or allocations. Budgets are more likely to make this impact, because business leaders see them as an authoritative guide.

Another way to look at this is that a financial forecasting report is a type of input for budget work. So you do the short-term forecasting, you plug it into the budget numbers, and then the budget numbers represent the final result that’s going to determine things like bonuses or rewards for performance. Other impacts may include:

•  Businesses cutting costs in various departments
•  Businesses allocating future revenue based on budget projections
•  Businesses taking on specific debt in order to balance a budget
•  Businesses deferring debt, consolidating debt, or refinancing in order to help with budget numbers

Although people often see the budget as the guiding force, forecasts also have their own impact. Forecasts can also be more useful in the conference room for a quick huddle based on new data, or for looking at whether an expected outcome is developing as projected.

Financial Forecasting and Budgeting – The Bottom Line

There’s another way to think about the difference between forecasts that operate as inputs, and budgets that are hard annual documents serving as a framework for operations.

The idea is that the budget, after taking into account various projections, will determine many business outcomes.

People will look back at the budget and its narrative in order to plan for the quarters and years ahead. The budget is also, ideally, in a digestible form that stakeholders can use to support their planning.

They will put all kinds of projection data and hard data into research to create that budget and make it is precise as possible.

 Modeling

In a  forecasting and budgeting process, modeling makes projections less ambiguous and more measurable, for planning purposes. 

For instance, accountants and budget managers who are using resources like supply chain planning software  may use something called linear regression in order to model projections.

Linear progressions basically use trends to project future outcomes. Planners fit individual values into a linear equation that is used for forecasting. Businesses aren’t so much drawing a line based on past data, as they are plugging in a series of inputs to come up with projections of what future revenues and expenses are likely to be.

These and other techniques help to form the inputs that go into budget work.