This blog is written by Mr. M. Zeeshan Ali, Assistant Supervisor Accounting Services. Please read this blog and provide your valued comments.
Budgeting and Forecasting
Businesses come in many shapes and sizes. There are small businesses that make giant buildings and big businesses that manufacture microscopic cells. The one factor that all businesses share in common is their singular reliance and focus on making a profit. After all, businesses cannot survive without money flowing through their accounts.
Similar to the human cardiovascular system, the flow of cash through businesses can be quite complex. After all, the complexity and necessity of financial planning is the reason for an entire industry full of businesses like ourselves to exist. Most successful financial plans involve a handful of key aspects. Two of the key factors for ensuring a steady, uninterrupted flow of cash pumps through your business are budgeting and forecasting.
Budgeting and forecasting play similar roles in financial planning. Let’s go over the basics.
What is Budgeting?
Budgeting is the process of laying out a specific and often itemized plan for how a company will spend their resources. Typically, budgets cover expected expenditures for the coming year or quarter. Budgets are essentially guidelines for how the company should utilize its resources. Once the allocated period of time has elapsed, budgets are compared to the actual fiscal results of that time period. This comparison is called a budget vs. actual report which is used as the basis for modifying future budgets or business operations to bring budgets and actual results in line with each other.
What is Forecasting?
Unlike budgets, forecasts are not prescriptive. Forecasting is the process of analyzing past data and current trends to make predictions for how the business will perform in the near future. Forecasts take into account how operations went during the same period of time in years past to make educated guesses on how well upcoming operations will go. Forecasting relies on data analysis as well as market trend analysis. Changes that will impact the outcome of financial operations should be incorporated into forecasts on a fairly regular basis to ensure the forecast remains as relevant and accurate as possible. Forecasts aren’t used as comparisons to performance like budgets are. This means forecasts should remain fluid while taking recent events into consideration to provide insight into the company’s expected position in the near future.
How do Budgeting and Forecasting Work Together?
Forecasting is the process of analyzing available data to make informed decisions regarding expected outcomes. Budgeting is the process of creating realistic financial goals with itemized cash in and cash out expectations for operations. This means the information gleaned from forecast analysis can be used to inform budgeting decisions.
Conversely, past budget vs. actual analyses can be used to inform forecast expectations. In other words, budgets and forecasts have a strong relationship and both work hand-in-hand to increase the accuracy and value of one another. It is valuable source to build a custom financial plan that will keep a business headed in the right direction and growth
M. Zeeshan Ali