Budgeting and forecasting are linked, but they play different roles in business. In a nutshell, a budget is a step-by-step spending plan, while a forecast is an estimation of an outcome. Both have an important role to play in taking control of your business and preparing for the future. Let us dive deeper into the key differences between the two and how to prepare them.
Although this article is written from a business perspective, the tools and steps are applicable to any organisation and to individuals that want to take control of their finances.
What is Budgeting?
Budgeting is a detailed spending plan. It provides financial direction while making sure you can meet your business goals and objectives. In other words, it controls what happens in your day-to-day operations by influencing how much money goes into different areas of the business, such as marketing and human resources.
Different Types of Budgets
There are two types of budgets: operational and capital.
An operational budget is used to control your day-to-day operations, while a capital budget focuses on major purchases or investments in the business. For example, an annual marketing campaign will probably fall into the capital category. This is because you do it once a year and not on a daily or weekly basis.
Budgeting Techniques
Budgeting techniques are used to determine how much you’ll spend in different areas of the business, such as sales and marketing. There are many types of budgeting techniques, including:
● Zero-based budgeting, where all expenses for a period must be justified.
● Percentage of sales budgeting, where a certain percentage of your total revenue is set aside for spending.
● Value proposition budgeting, where you allocate resources based on the value each budget item brings to your business.
● Surplus budgeting, where the total revenue is greater than the total expenses.
● Gap budgeting identifies gaps between goals and actual performance levels in different areas of your business.
How to Prepare a Budget
To prepare a basic budget, you need to calculate the total revenue for the period you’re looking at.
Then, calculate your fixed and variable expenses. You should also factor in any planned purchases or investments over the timeframe, as well as the expected changes to your overall business strategy.
Subtract your expenses from your income and then create a tax estimate. The final figure will be the profit that you have to invest in your business.
What is Forecasting?
Forecasting helps you create a plan for the future. It is used to predict if your business will meet its financial goals. Forecasts are often related to quantitative data like sales forecasts or cost projections, but they can be based on qualitative data as well.
The key difference between budgets and forecasts is that budgets are effective in the short term, while forecasting works best over a longer period.
Qualitative vs Quantitative Forecasting
There are two main types of forecasting: qualitative and quantitative. A qualitative forecast is based on expert opinions, such as that of an accountant, while a quantitative forecast uses hard data to produce numerical forecasts like sales projections.
How to Prepare a Forecast
To prepare a forecast for your business, you will need to list all of the assumptions that underpin it. This includes things like expected sales growth and any major changes in the market or economy over a certain timeframe. Also factor in variables such as pricing models, competitor activity, and customer behaviour into your quantitative forecasts.
The Key Difference
In conclusion, budgeting helps you control your daily operations. Forecasting is a tool for predicting future performance. A budget is used to set limits on your spending, while a forecast is to predict whether your business will meet its goals. Both are important tools for business performance and growth, and thus should be taken seriously.
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