Every finance professional knows the importance of budgeting. A company can thrive or dive based on its ability to handle resources wisely. Recently, I’ve heard the term “forecasting” a lot. At first glance, one might dismiss it simply as a synonym for budgeting, but in reality the two represent very different ways of approaching your company’s financial welfare. Let’s take a closer look.
Budgeting is a detailed, comprehensive look at how management envisions the business will perform in terms of results, financial positioning and cash flows for a specific period of time. Budgets are typically updated once a year, though managers might take remedial steps along the way to bring actual results back on track with the projected budget.
Forecasting is an estimate of what will actually be accomplished and is usually focused on just major revenue and expense line items. A forecast may be updated monthly or quarterly depending on how quickly the industry changes. Forecasting can be used for short-term operational adjustments or considerations, as in sales performance, staffing, inventory and/or production plans.
In short, budgeting is a plan for the intention and destination that a business would like to go whereas forecasting is the illustration of where a company is actually going.
So which is more effective?
In 2014, Ken Wolf wrote “Why It’s Time to Say Goodbye to Traditional Budgeting” for the American Management Association. He believes there are three main issues with traditional budgeting: the process requires too much time, money and corporate resources; an inflexible plan quickly becomes obsolete; and compensation tied to performance versus budgeted expectations leads to ill-conceived motivations.
Wolf does not go as far as to suggest getting rid of budgets altogether. Rather, he suggests melding the two processes together. This, he says, “can be defined as a projection into the future, partly based on past performance, that is routinely updated to incorporate input and information reflecting changing market, industry and/or business conditions. It is not meant to be a fixed target, but rather a best current prediction as to the organization’s financial and operational performance over a certain time horizon.”
At Boyer & Associates, we believe that staying on the leading edge of technology can make a difference in making businesses better. That’s why we’ve partnered with Solver, Inc. to offer BI360, an easy-to-use budgeting and forecasting solution. For more information on this tool, register for our April 26 webinar on Advanced Budgeting in BI360.