Budgeting and forecasting are two essential tools for financial planning. But how can you tell them apart?
Despite being very different practices, the two terms are often used interchangeably. If you’re guilty of doing this yourself (and are hoping to uncover the truth, before the truth puts you on the spot), you came to the right place.
In simple terms, forecasting is an estimate of your future income and expenses – while budgeting is the process of creating a plan for how you will spend your money, over a specific period of time.
While both budgeting and forecasting are important, they serve different purposes – so you need to use both strategically.
Budgets exist to control your spending.
Creating a budget is all about setting parameters for expenditure.
This process is mainly led by a business’ finance department but will often include input from the heads of other departments, too. It generally happens at the start of the financial year, with stakeholders coming together to agree spending targets, how this will be monitored, and any key financial controls for the year ahead.
Once the budget is agreed by the finance team, it will usually be signed off at board level and then adjusted as the year progresses.
A key feature of a budget is that it’s primarily a finance function, held in a finance system.
For finance teams, budgets contain mission-critical details. By running regular reports to track the budget vs ‘actual’ spend, they can carefully manage the business’ cash flow - which will then directly impact business activities, such as procurement and purchase approvals.
Forecasts are an important projection to help you to plan for the future.
In contrast to budgeting – which is very much focussed on the here and now - a forecast requires you to look ahead and predict future performance (such as incoming revenue and outgoing spend).
This isn’t just an activity for the finance department; all operational departments are likely to be involved with forecasting.
Creating a forecast will use numerous data sources such as sales and revenue, headcounts, HR, operations, strategic projects and more. It provides a target to work towards, as well as metrics for the Board – such as what’s expected for the business in the period ahead. The initial forecast is likely to happen at the start of the year but will then be reforecast monthly or quarterly, based on actual performance.
Typically, the finance team don’t manage the output of a forecast – so the data isn’t held on their system. However, forecasts do have a deep impact on the business at large, so individual departments will often leverage them to assist the collective goal of business growth.
For example, the Board might need access to profit and loss forecasts in order to plan future investments, while the sales team may need lead generation and sales pipeline forecasts to create internal targets. In addition, forecasts are extremely useful for ‘what if’ scenario planning, where the cost and return of a proposition are weighed up to predict the chance of future success.
However, budgets and forecasts aren’t always used in isolation. There are instances where they support each other to help a business achieve its goals.
If a company is trying to raise funding, for example, it’ll need an accurate forecast to produce a business valuation.
Overestimations can damage credibility, so the valuation can’t stray far from the facts – even when it’s a projection. To help, the forecast will usually be supported by ‘actual’ data, sourced by the finance department. This could include current budget reports to demonstrate existing spend and controls, as well as other real-time data for positioning. Combined, this can help the business to create a compelling proposition that sets it apart in the market.
Our Tips for Budgeting and Forecasting Success
So, now you’re up to speed on the differences between budgeting and forecasting
– how do you use these tactics to your business’ advantage?
We’d suggest you start with….
Making sure your data is accurate and up to date.
Forecasting and budgeting without real-time data often leaves you to work with a snapshot of information, which is only representative of a single moment in time. Often, this can leave you with a short-sighted report which omits the most recent, critical details.
Similarly, if information is submitted manually, you could find yourself working with inaccurate data which has fallen foul of human error and keying mistakes.
Using autonomous finance software can help you to source data that’s always accurate and accessible, right up to the minute.
Budgets, in particular, will impact every area of your business – so it’s important to be both transparent and receptive. Otherwise, you could find yourself lacking vital context for decision-making (or making decisions that simply won’t be practical for those working under its influence).
Fortunately, cloud finance software that acts as a centralised resource can facilitate cross-referencing, as a single source of truth for all your key business information. This makes collaboration simple, with essential financial reports available for the right people, at the right time.
No matter how well you budget and forecast, a curveball could hit your business at any moment. Exact data and up-to-date reporting will give you the freedom to act quickly, armed with the knowledge required to make essential judgements.
So, don’t restrict yourself. Make sure you’re equipped with budgeting and forecasting software that gives you a 360-degree view of your financial position, alongside customisable reporting which offers the power of instant analysis, to the most granular details.
iplicit’s cloud finance software makes budgeting and forecasting a breeze.
With our complete solution, you can:
- Build multi-dimensional budgets and reforecast with ease
- Consolidate data into departmental and project budgets, as well as over-arching organisational views
- Check actuals vs forecast, live and at any time
- Give key stakeholders the power to self-serve with transparent data, across all areas of their operation
- Create automated workflows which trigger approval requests
… and much more.
Of course, the best way to discover the true benefits of iplicit’s award-winning finance software is to try it for yourself. We’d love to have a chat to show you the product’s key features – so why not get in touch with us today?