Before understanding the relationships and differences between budgeting and forecasting, let’s understand the meaning of these terms.
Definition of Budgeting
Budgeting means the projection of a comprehensive and coordinated plan, expressed in financial terms, for the operations and resources of an enterprise for some specific period in the future. It is a strategy outlining how the management intends to achieve particular goals. The commitment of the management is key to the success of the preparation and implementation of a budget.
A budget in business formally expresses the anticipated revenue and expenses for a specific future period. In other words, a budget is used to project the financial position and results for a future time period.
Basic features of a Budgeting
- Budgeting is a comprehensive and coordinated plan, also known as an integrated Plan.
- It is expressed in financial terms i.e., financial quantification.
- It is a plan for the firm’s operations and resources.
- Budgeting is a future plan for a specified period.
Definition of Forecasting
Given the historical data and anticipated changes, a forecast is a probability that an event will occur. Forecasting is the process of determining what the company will actually accomplish. There is no assumption regarding management’s commitment to achieving the forecast.
In other words, forecasting is a technique that produces accurate predictions of the future course of trends using historical data as inputs. On the basis of recent and past data, forecasting enables businesses to set reasonable and quantifiable goals. Businesses can determine how much change, growth, or improvement will be considered successful by using accurate data and statistics.
Basic features of a Forecasting
- The forecaster is not under any obligation to follow through on the predictions.
- It is updated whenever new data become available and is based on historical information.
- It is not required to be expressed in monetary terms.
- It does not always correspond to a year.
- It does not entail discussions, approval, or scrutiny.
Difference between Budgeting and Forecasting
Even though the terms “budgeting” and “forecasting” may seem similar, they are significantly different. A budget is a statement of the management’s plans to influence events and take proactive measures to achieve forecasts. It represents the managerial commitment to guaranteeing the accomplishment of stated goals. There is a negotiation, approval, and review process involved. However, there is no time limitation, discussion, approval or review process in forecasting.
The major differences between budgeting and forecasting are:
| Budgeting | Forecasting |
| It involves quantitatively expressing the financial plan. | It involves examining historical data to predict future results based on trends. |
| It is a business plan’s financial presentation. | Forecasting aids in the prediction of commercial trends. |
| Setting up a target for costs and expenses is part of budgeting. | Typically, setting up targets is not a part of forecasting. |
| These are less flexible and are not altered unless an assumption is modified. | These are more adaptable, and businesses frequently change them. |
| Typically, it lasts the entire year. It is a yearly event. | Typically, this is done every three, six, or twelve months. |
| Its scope is broader. It applies to more than just the finance industry. | The application of forecasting is restricted because it primarily concerns businesses. |
| This is more about specific goals that a business wants to accomplish. | Forecasting is more of a projection of what a company might accomplish. |
| This tactical tool aids in year-round operation management. | This strategic tool aids in evaluating potential performance. |
| Typically, budgeting does not require any kind of analysis. | Forecasting is primarily an estimation process, so analysis is necessary. |
Whatever the differences between budgeting and forecasting, both are important for effective management and play a key role in achieving business goals.