Let’s face it; finances can be confusing. There are a lot of terms and concepts that sound similar and are grouped together, which can make distinguishing the differences between them difficult. Two of the greatest offenders of this are budgeting and forecasting. At most financial institutions and firms these practices are combined but in actuality they are separate ideologies that can have different effects on your business. They key to success in managing your finances is knowing the differences between budgeting and forecasting in regards to your business. This way when it’s time to sit and plan out your books you know exactly which money should be going where and have a complete understanding of where your business is headed. Allow our payroll service company Nazpay to provide you with a concise comprehension of budgeting and forecasting and how each applies to your financial management moving forward.
By definition, Budgeting is the practice of estimating your expected income and expenses for a given period of time in the future. This also includes a detailed representation of future results, where you stand financially, and where you want to be in regards to your future cash flows. Most budgeting only occurs on an annual basis or more depending on if management thinks it requires further review. Your budget is usually compared to your actual financial results to determine expected performance. This can be used to show which parts of your business need improvement and ones are performing adequately. In some businesses, mostly those involved in sales, budgets are utilized as incentives for employees by showing how the numbers may affect their compensation.
While many people believe that forecasting is the same as budgeting but it’s actually the complete opposite. Where budgeting is an estimate of what may be achieved, forecasting is an estimate of will be achieved. Forecasting is performed on a larger scale, typically limited to major revenue and expenses. Unlike budgeting, it does not indicate financial standing, though the practice can be applied to future cash flows. Also contrary to budgeting, which is usually done on an annual basis, forecasting is more frequent, taking place on a quarterly and sometimes monthly basis. This practice can used for short-term considerations like staffing, inventory management, and production planning. Another difference is that no analysis that can be used to compare forecasts to actual performance. On that note is also not recommended to use forecasts as an incentive for employees as it cannot impact performance-based compensation.
Now that you know the differences between Budgeting and Forecasting, do you know where your business is headed? While your company needs forecasting, budgeting is not always necessary, though it is a useful practice for effectively managing your finances. Things brought up in a forecast require immediate action, while budgets, depending on market changes, can become obsolete in just a matter of months. If you have any further questions on Budgeting and Forecasting and where they differ, feel free to give us a call at (516) 584-8035 or visiting us at Nazpay Inc. Now get out there and best of luck on all of your future endeavors!