Budgeting is a planning process that includes your business's income (revenue) and spending (expenses) over a set period. Budgets most commonly look at the next 12 months of the business and track finances over a calendar or fiscal year.
It helps to think of a budget as a financial roadmap for your business. The budget describes what management wants the business to do going forward and how it intends to get there. That said, a budget is not a plan.
Budgeting can follow either a top-down or a bottom-up approach.
Use historical financial data: Businesses develop budgets using internal historical financial data. To build next year’s budget, they look at prior budgets, compare them to prior actuals, and gather other internal and external data. This results in a budget that reflects company goals and expectations going forward.
There are many ways to approach this, from incremental budgeting to activity-based budgeting.
Budgets are “static”: Unless something drastic occurs, your budget from January (or the beginning of the fiscal year) doesn’t change over the next 12-month period. For every month of budget, you’ll compare actual performance (“actuals”) against the budget. This determines how closely the business follows the plan and if it aligns with the expected outcomes.
Budgets take time: Budgets require a lot of detail. “Budgeting season” starts at least three months before the budget takes effect. For calendar year budgets, planning begins no later than October 1. Larger organizations with more extensive budgeting may begin the process even earlier.
At the end of the budget process, you’ll have a detailed plan for the financial life of the business, including:
Now that you understand budgets, let’s take a look at forecasts.
Forecasting is the higher-level, more flexible cousin of the static budget. It looks at the bigger picture—major revenue and expense items—and can change over time due to reviews and changes in the economic landscape.
Forecasts can focus on the entire business or a specific subset of finance, like ARR. Forecasts may be based on the budget, but they may also be what-if scenarios, edge cases, or cash forecasts.
Regular updates: Unlike a static budget, forecasts get regular updates—at least every six months, although different industries revise their forecasts every quarter or month. Forecasts that add future periods as the previous periods close are known as “rolling” forecasts.
Real-time feedback: If a budget is a roadmap for where the business wants to go, the forecast provides data on its direction. Forecast information changes based on real-world changes with new info. They may change based on the economy, the supply chain, or the competitive landscape.
Mix of historical and current data: Forecasts use historical data (like financial statements) to make predictions. But largely, they focus on what’s currently happening in the business and the larger economic picture.
If a budget summarizes a company's goals and forecast models what those goals should achieve, then a budget forecast predicts the outcome of the budget.
In other words, the budget forecast answers this question: "if followed exactly, what end state does this budget create?"
A budget forecast is a projection of the budget. This means it's a key component of variance analysis or any P&L budget vs actuals model.
The budget forecast references the budget instead of historical values, which is especially helpful for organizations with inconsistent historical performance.
Because it measures the future state of the budget, the budget forecast is a great tool for measuring performance and for Corporate Performance Management (CPM).
It helps to remember these defining differences when discussing forecasts and budgets:
Purpose
Prep Time
Timeframe
Flexibility
Reliability
Though budgeting and forecasting are separate activities, they are connected. Each informs the other, and both contribute to an accurate and actionable financial outlook.
Budgeting is the root of your planning process. Creating an annual budget, including budget forecast expenses, should come before any forecasting activities. Once an annual budget is in place, you can use the information to create forecasting for the following month, quarter, or year.
As the year progresses and actuals become available, forecasts and associated KPIs may adjust. They will reflect changes in business performance or outside forces. You can then use this forecasting data for the next budget planning process.
To start your planning process off right, use these steps to create a strong, accurate budget:
Want a more comprehensive list? Head over to our strategic budgeting guide.
Now that you have your budget roadmap, you can forecast probable outcomes over the next period(s).
The completion of budget forecasts signifies not the end but the commencement of a vital phase — post-forecasting analysis and continuous improvement.
Post-forecasting analysis is crucial for pinpointing variances between forecasted and actual results, enabling proactive decision-making and continuous improvement.
Identifying Variances: Conduct a thorough analysis of forecasted versus actual results to identify any variances. Understanding these differences is key to pinpointing areas that require attention.
Performance Evaluation: Evaluate the performance of forecasting models and methodologies. Identify which approaches yielded more accurate predictions and contributed to better decision-making.
Feedback Loop Implementation: Establish a feedback loop involving key stakeholders to gather insights on the forecasting process. Act on feedback to make iterative improvements continuously.
Embracing mistakes as learning opportunities and systematically analyzing errors fosters a culture of continuous learning, enhancing future forecast accuracy and promoting a dynamic forecasting environment.
Let’s explore strategies to overcome cumbersome tasks and enhance the efficiency of budget forecasting.
Identifying Time-Saving Strategies
Efficiency Improvement in the Budgeting Process
By implementing these time-saving strategies and efficiency improvement measures, FP&A decision makers can empower their teams to navigate their budget forecast expenses more effectively.
Now you know the basics of budgeting and forecasting. You also know where the budget forecast fits into the bigger picture.
If you'd like to start creating a budget forecast, download and play around with our free P&L budget vs. actuals template for Excel and Google Sheets.