Difference Between Budget and Forecast Explained
Budget and forecast are significant financial reports businesses use to plan their future investments and expenses. They are made based on past records, reports and analyses. Even though companies use both tools for efficient financial planning, their purpose differs from one another. Read on to know about the key differences between budget and forecast and their types.
What Is a Budget?
A budget is more like a rough plan of plausible expectations of what a company wishes to achieve in the upcoming financial year. A budget typically includes anticipation of cash flow, an estimation of expenses & revenues, expected debt recovery and the difference between the actual financial statement and budget. It creates a structure for the goals a company wants to pull off by the end of that particular financial year.
A budget is not a rigid regime which has to be followed by a company. It is reviewed periodically and is adjusted throughout the year depending on the company’s performance.
What Are the Types of Budgets?
Depending on purposes and performance, there are six types of budgets in India. Take a look at the brief description of them below:
- Balanced budget: A balanced budget is where the prediction of the budget matches with the actual or achieved budget at the end of the year. This is the ideal form of budgeting.
- Deficit budget: A deficit budget is where expenditure exceeds revenues generated. This type of budget adds to the liability of a business as it increases the debt capital. It is the only option when taxation does not add up to the amount needed in times of economic emergencies.
- Surplus budget: A surplus budget is just the opposite of a deficit budget. Hence, when revenues exceed expenditure, it is known as a surplus budget. This type of budget helps in adding funds to the reserve stock, which can be useful in harsh economic situations such as inflation and deficit budget.
- Outcome-based budget: An outcome-based budget is more like a progress card recording every plan made and its outcome. This makes the whole process more easily comprehensible and accountable. It takes into account both the quantitative & qualitative details of the budget.
- Zero-based budget: As the name suggests, this type of budgeting is done from scratch. It is a cost-effective system for the company where it focuses on the necessary expenditures during a particular budgeting period. It aims to balance the income and expenditure of a company. Zero-based budgets are reviewed & renewed periodically.
- Gender budget: Gender budgeting is done by keeping in mind the gender perspective. It does not serve the purpose of accounting but makes sure that all planning and executions are done in a gender-neutral manner.
What Is Forecasting?
Almost similar to budgeting but with a significant difference, a forecast predicts the possible financial outcome of the business. Unlike budgeting, which deals with plausible expectations in a financial year, forecasting uses past data to decide the future growth of a company.
It can be used for both long and short-term planning. Forecasts are not compared with the final analysis but are reviewed frequently.
What Are the Types of Forecasting?
There are three basic types of forecasting used by companies. They are – general, sales and financial forecasting. Each type is briefly discussed below:
- General forecasting: A general forecast is a detailed report which includes expected income & expenditure, current financial stature, future market analysis based on current & past market trends and competitor analysis.
- Sales forecasting: Sales forecasting focuses on how much profit a business can expect over the estimated period. It includes past and current sale records and also an estimation of how many sales can possibly take place in future.
- Financial forecasting: Financial forecasting focuses on the potential financial growth of a company. It includes heavy research on the various types of revenues and costs involved and how they can impact the financial strategy of the company.
- Accounting forecast: Accounting forecast is the best practice if a company wants to estimate the future cost of its raw materials. It analyses the past and present data to predict an estimation of future costs of raw materials, inventory and other utilities.
- Demand forecasting: Demand forecasting, as the name sounds, is used to determine the future needs of the market. The other types of predictions are based on this as it will help to ascertain the raw materials, inventory and purchase requirements for the product in demand.
- Capital forecasting: Capital forecasting is used to predict how much capital will be required in the future. Capital forecasting depends on some factors which are not constant, such as revenue, assets, accounts receivable, investment funding and lines of credit. This is the trickiest of all other types of forecasting as the market keeps fluctuating along with the factors mentioned above.
What Are the Differences Between a Budget and a Forecast?
In the following table, you will find the differences between a budget and a forecast. This simplified comparison of budget vs forecast will help you gain more clarity on the topic.
Based on planned events.
Based on probable or anticipated events.
Has a fixed target for a period.
Target is flexible and tentative.
Covers a shorter period of time.
Covers both long and short periods of time.
Budgeting begins when forecasting ends.
Forecasting ends with the probable planning of future events.
Area of Work
Budgeting accounts for the whole business.
Forecasting usually focuses on a specific function.
Budgeting acts both as a controlling & planning financial tool.
Forecasting only acts as a financial planning tool.