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What’s the Difference Between Budgeting and Forecasting?

April 15, 2013

A budget is how you hope the business will operate; a forecast is what you think will happen. Budgeting and forecasting mechanisms are the same, but the budgeting process comes first. Forecasts are made later, when the outlines of the future are better defined. At that point, a comparison between budget and forecast may suggest actions to be taken and adjustments to be made to bring them closer together.

Computer-based spreadsheets make the development of budgets and forecasts much easier today than for previous generations of managers. There are even software packages that provide forecasting tools, although these templates must often be modified to fit the needs of a particular business.

Despite the availability of electronic assistance, the most critical element of cash and fund projections is the quality of the estimates made by knowledgeable managers in preparing them.

Effective management of cash and credit relationships depends on good funds forecasting. Without funds forecasts, the treasurer will not know when to expect cash surpluses or deficiencies, the amount of the surplus or deficiency, nor the duration of the borrowing need or investment opportunity. Funds and cash forecasts may be made for short-range planning purposes on a daily, weekly, or monthly basis, or for long-range planning purposes, usually for one year or longer.

Adapted with permission from Smart Financial Management by William S Sihler, Richard D. Crawford, and Henry A Davis (Amacom Books).

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About The Author

William W. Sihler (Charlottesville, VA) is Trzcinski Professor of Business Administration at the University of Virginia’s Darden School. Richard D. Crawford (Charlottesville, VA) has extensive experience in banking, commercial finance, and private equity, and is currently a Visiting Lecturer at Darden. Henry A. Davis (Charlottesville, VA) is a consultant specializing in corporate finance and banking,. He is managing editor of The Journal of Project Finance and Strategic Investor Relations.

One Comment »

  1. avatar

    Its true that Budget and forecast are same. but what make them differ is that budget is based on the actual quantities were as forecast is based on the Historian data.

    During budgeting a firm ensure to set up a financial plan which complice with their available resources while forecasting extend the financial resources based on the available resources.

    Although this is not really clear or easily understandable ,future research is still needed as how we can investigate effecttive forecasting or budgeting.

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