Budgets and Forecasts: The Same?
November 03, 2014
Many small business owners might answer this question in the affirmative assuming that budgets and forecasts are the same. On paper, budgets and forecasts may look the same and the numbers might be similar for some accounts, but the two documents are actually different.
A budget is a target in financial terms where the business wants to go. It is the company's intention to hit this target – an objective, a goal. Budgets should be neither optimistic nor pessimistic, but should set the minimum standards for what the company aims to achieve. When the target is met, the owner and managers have met their expectations and are on target with their goals for the accounting period involved. Of course, any business would like to see even better performance and higher profits than the budgeted goal.
Conversely, a forecast also contains financial data but is based on what is currently happening in the company. It is where company is actually headed based on current operations, economic climate, competition, and other variables.
A budget might be prepared for a period of one year (or any accounting period) and not changed until a subsequent budget is prepared. A forecast on the other hand might be changed monthly due to changing circumstances.
Active vs. Passive
Since the company is dynamically trying to achieve certain goals, a budget is a more active document than a forecast. Since a forecast takes into account what is actually happening in the business and what results are expected because of current circumstances, it can be considered more passive.
- A budget is the intended goal of a business. It is is an expression of where the owner wants the company to go.
- A forecast is the expected goal of a business because of what is currently happening in the business and is an expression of where the company is actually headed.
If operations are efficient, marketing plans are effectively implemented, costs are estimated with a degree of accuracy, and revenue is on target, then a budget and forecast should eventually be parallel to each other.
Posted by Richard Weinberger, PhD, CPA
Chief Executive Officer
Association of Accredited Small Business Consultants