Budget Forecasting: What It Is and How To Do It (2024)

We often hear different terms used to describe forward-looking versions of a company’s financial statements. People frequently use these terms interchangeably, with some having a deeper understanding of the nuances in terminology than others. Forward-looking financial documents may include budgets, projections, forecasts, and pro forma financials. All of these represent hypothetical situations–that is, they are estimates or educated guesses (or occasionally just wishful thinking) about what may happen in the future. But the differences are important.

In a recent post, we covered the fundamental distinctions between forecasts and projections. There are some subtle but relevant differences there. It’s especially helpful to understand those differences when speaking with investors, regulators, or other key stakeholders.

Budgeting and forecasting, likewise, are somewhat different. In this case, though, the distinctions are not quite as subtle, although you may be tempted sometimes to muddy the waters by mixing the two. In fact, the combination of budgeting and forecasting can sometimes be a useful approach, which is why there has been so much interest lately in budget forecasting.

Before we dive into that, let’s explore the fundamentals of budgeting and forecasting.

What Is a Budget?

A budget is a financial plan for a specific period of time, typically covering one complete fiscal year. Generally speaking, budgets represent an unfolding financial reality that a company’s managers hope will come to pass, or to put a more optimistic spin on it, the budget represents management’s plans and intentions.

There are a number of different methodologies for developing a budget. Historically, the most common approach has been to use last year’s budget numbers (or actual performance) as a starting point, then to make adjustments upward or downward to individual line items based on changing business conditions and any change in the strategic direction of the business. The process often involves adjustments to planned sales revenue based on past trends and future plans. Nevertheless, as a budget, it tends to emphasize intentions over expectations.

There are several other approaches to budgeting that have also garnered considerable attention lately. These include zero-based budgeting, driver based budgeting, and activity-based budgeting. Each of these has distinct advantages and disadvantages. In the past, a key concern about several of these methods has been the amount of time and effort required to build a bottom-up budget every year. With the powerful planning and budgeting software available today, though, the balance has shifted for many people in favor of these more sophisticated methods.

The CFO's Guide to Zero-Based Budgeting

Access Resource

What is a Forecast?

Whereas budgeting is about what management intends and hopes for, forecasting is about what management actually expects to happen. In other words, forecasting leans slightly further toward realism then budgeting does. There should be little or no wishful thinking involved in a forecast.

Just like budgets, forecasts may cover variable time periods, often spanning an entire year or more. It is common, however, for forecasts to address more focused time frames, such as the next quarter or six months. It is also more common for them to be limited in scope–for example, attempting to predict sales revenue for the coming quarter or for specific seasonal peak periods.

As such, forecasts tend to be somewhat quicker and easier to prepare. Because they tend not to be used as performance benchmarks for employees, they do not require as much back-and-forth negotiation as budgets do. Budgets tend to be internal documents, intended for planning and assessment. Projections, on the other hand, can serve as management tools, but for many companies they are also disclosed publicly, especially in the case of publicly traded corporations where such disclosures are legally required.

So What Exactly is “Budget Forecasting”?

Now that you understand the differences between budgeting and forecasting, you are naturally left with the question “What is budget forecasting?” In fact, you will not find many formal definitions of the term. Perhaps it is most useful to describe budget forecasting as a kind of hybrid document that combines elements of both budgets and forecasts.

In fact, this is a process that most business managers engaged in at one time or another, simply because it can be useful in understanding how the business is likely to perform over the entire duration of the budget cycle, based on a combination of year-to-date results, plans for the remainder of the year (that is, the remaining budget), and expectations for the remainder of the year (that is, a forecast).

A variation on this approach is sometimes referred to as “reforecasting” or “budget flexing.” These terms generally apply to situations in which a significant event has occurred, resulting in a substantial deviation from budget. The onset of the COVID pandemic in 2020 represents a perfect example of the kind of situation that would call for reforecasting. As businesses were shut down and demand shifted abruptly for various goods and services, virtually every company in the world experienced significant, unexpected change to their annual budget. Other examples might include the emergence of a new competitor, the development of a new technology that supplants a company’s product, or external conditions that lead to an abrupt change in market demand.

Budget forecasting is a bit different from reforecasting in the sense that it does not necessarily imply a sudden and unexpected material change to the business. For some, this takes the form of budget vs. actual reports alongside projections for the remainder of the fiscal year. If you expect material changes, or if management is considering key decisions that could impact the financials, then it can also be useful to incorporate projections that map out potential outcomes of different scenarios under consideration.

Many companies get started with budget forecasting by combining information from various sources in spreadsheets, often by copying and pasting static information from their ERP system, from budget spreadsheets, and combining that with formulas that predict likely future outcomes. Unfortunately, that can be a slow, tedious process, and it is prone to error.

Because the manual approach takes so much time and effort, budget forecasting in many organizations does not get updated as often as it should be. When the finance department has powerful budgeting and planning tools at its disposal, though, updating the budget forecast with near-real-time information is possible in mere seconds, with complete accuracy, and no additional effort.

At insightsoftware, we provide powerful budgeting and planning tools, along with near-real-time reporting capabilities that integrate with over 140 different ERP applications. If your organization is seeking better, faster, more accurate and flexible ways of planning and budgeting. To get started with budget forecasting, you can download our free template today.

Budget Forecasting: What It Is and How To Do It (1)

Plan Ahead for a Successful 2022 Budgeting and Forecasting Season

Watch Now

As an expert in financial planning and budgeting, I've delved deep into the intricacies of forward-looking financial statements, particularly in the context of budgeting and forecasting. My extensive experience allows me to shed light on the subtle yet crucial distinctions between these terms, providing insights that go beyond the surface understanding.

The article you've presented delves into the nuances of forward-looking financial documents, including budgets, projections, forecasts, and pro forma financials. Let's break down the key concepts discussed:

  1. Budgeting:

    • A budget is a financial plan for a specific period, usually covering a fiscal year.
    • It represents a company's unfolding financial reality that managers hope will come to pass, emphasizing intentions over expectations.
    • Various methodologies exist for developing budgets, such as zero-based budgeting, driver-based budgeting, and activity-based budgeting.
    • Budgets can be based on past performance, involve adjustments for changing business conditions, and emphasize management's plans and intentions.
  2. Forecasting:

    • Forecasts focus on what management actually expects to happen, leaning slightly further toward realism than budgeting.
    • Like budgets, forecasts may cover variable time periods, often spanning an entire year or more, but they can also address more focused time frames.
    • Forecasts tend to be quicker and easier to prepare compared to budgets and are not typically used as performance benchmarks for employees.
    • Projections, a subset of forecasts, may be disclosed publicly, especially for publicly traded corporations.
  3. Budget Forecasting:

    • Budget forecasting is described as a hybrid document that combines elements of both budgets and forecasts.
    • It involves understanding how a business is likely to perform over the entire duration of the budget cycle, incorporating year-to-date results, plans for the remainder of the year, and expectations.
    • "Reforecasting" or "budget flexing" may occur in response to significant events, such as the COVID pandemic, resulting in substantial deviations from the budget.
    • Budget forecasting is distinct from reforecasting, as it doesn't necessarily imply sudden and unexpected material changes to the business.
    • It may include budget vs. actual reports alongside projections, incorporating potential outcomes of different scenarios.

The article emphasizes the importance of accurate and flexible budget forecasting, highlighting the challenges of manual approaches and advocating for the use of powerful budgeting and planning tools. If your organization is looking for better, faster, and more accurate ways of planning and budgeting, the article suggests leveraging tools that provide near-real-time reporting capabilities integrated with ERP applications.

Budget Forecasting: What It Is and How To Do It (2024)
Top Articles
Latest Posts
Article information

Author: Margart Wisoky

Last Updated:

Views: 6606

Rating: 4.8 / 5 (58 voted)

Reviews: 89% of readers found this page helpful

Author information

Name: Margart Wisoky

Birthday: 1993-05-13

Address: 2113 Abernathy Knoll, New Tamerafurt, CT 66893-2169

Phone: +25815234346805

Job: Central Developer

Hobby: Machining, Pottery, Rafting, Cosplaying, Jogging, Taekwondo, Scouting

Introduction: My name is Margart Wisoky, I am a gorgeous, shiny, successful, beautiful, adventurous, excited, pleasant person who loves writing and wants to share my knowledge and understanding with you.