Budgeting and forecasting are two essential management tools to anticipate needs and to avoid crises. A budget is a plan made a year in advance that provides guidelines for expenditure and serves as a benchmark for the analysis of the performance of a business. Forecasting on the other hand is extrapolating previous performance on to a period in future and coming up with numbers taking into account extraneous factors. Both these concepts are different but essential concepts of money management.
Budgeting allows one to have control over cash flow and makes a person or an organization have better control over payment process. Budgeting is an organizational plan in monetary terms as it contains all planned expenses and revenues. Budgeting is a plan expressed in financial terms. It sets targets for the organization to meet. Forecasting is similar to budgeting but is merely a prediction of what will happen after taking into consideration of what happened in the past. Budgeting sets targets but forecasting does not.
A budget is a statement of how the business, department or a unit intends to spend money that is made available to it. It therefore has contingency plans that show alternative sources of funds when there is a shortfall in anticipated income. In contrast, a forecast is a prediction of future income and expenditure based upon past performance which may or may not be accurate. With forecasting you predict, and with budgeting you plan for the future of the business with the help of forecasting. If a company invests in a machine, installs it and produces something for the public, it would be foolhardy to do so on faith without resorting to budgeting and forecasting.
There are multiple factors that are at play when forecasting and budgeting and it is impossible to generalize for a particular situation. What a company does now has an impact on the future health and performance of the company. This is why it is imperative to do both budgeting as well as forecasting before incorporating any new idea or making a new investment. Forecasting and budgeting are traditional, conservative tools in the hands of the management to make managerial decisions.
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Summary • While budgeting is a plan in financial terms, forecasting is prediction about future income and expenditure • While budgeting is based upon planned events and then controlling our positio9n in future, forecasting is just an estimation of uncertain future • While budgeting is done for a financial year, forecasting is done for a longer time period • While it is essential for a corporation to indulge in budgeting, forecasting is more suitable in places where budgeting has not been done
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