If someone were to ask you to explain the difference between forecasts and budgets, could you?
While some may think these two accounting terms are interchangeable, they each have very different meanings and roles in your business. Since we are close to closing out 2020, you’re probably working on your business goals and vision in the upcoming year.
With that in mind, let’s think of your forecast as your business vision. At the same time, we can think of your budget as we would your business goals. When creating your vision, you look back upon what the business has done well. You’ll also consider what hasn’t worked to create a realistic future for the company. In order to achieve your vision, you must set goals that will build upon themselves to help your business succeed in its vision.
Forecasts– Your Business Vision
A business forecast uses historical business data to predict future trends. Just like creating a vision for your business, you’ll pull upon the past to help you make attainable predictions for where the company will be by the end of the year or even longer.
Visions are flexible and can be adjusted as often as needed based on data pulled from completed goals. After the forecast time period has elapsed, the company will review historical data (completed goals) to determine what worked well, what didn’t, and revise the vision (forecast) for future business success.
Budgets – Your Business Goals
A budget is a period-specific, future-focused business plan done in the short-term to determine the debits and credits needed to achieve the business vision. The budget is created and then, at the end of the specified period, compared to actual finances. Then, you will analyze any variances to determine why the projections and transactions don’t match up.
You’ll use the information gleaned from your analysis to create the next budget. Then you can use your prior month financials to update and change the forecast to be more in line with the company’s future growth. While there is usually only one budget, there can be several forecasts, especially if there are short-term and long-term growth requirements.
Key Differences – Forecasts and Budgets
Here are some of the key differences between a budget and a forecast:
- Created for a future period using expected revenues and expenses for that time period
- Prepared for the short-term, usually no longer than an accounting period
- Only adjusted when assumptions used to create the initial budget are changed
- A quantifiable outline of debits and credits needed to achieve the vision
- Used to compare and analyze expected results versus actual results
- Financial trends projected for the future using historical data
- Can be prepared for the short-term but also long-term, spanning up to several years
- Updated frequently to reflect real-time data and trends
- A strategy tool designed to implement future company growth spanning several years
- Used for projection purposes, no performance measures used to compare forecast versus reality
If you’re still not sure about the difference between budgets and forecasts, that’s okay. At JStevens Accounting in Annapolis, Maryland, we can help you with both. We can use your historical data to create a realistic forecast for your business growth and create a working budget to help your forecast become a reality.
Contact us today so we can set up a consultation. We’ll help you start 2021 strong!