Budgeting & Forecasting

Frequently asked questions

• What's the difference between forecasting and budgeting?

  +
  Forecasting is projecting future financial incomes by developing models and scenarios around revenue, expenses, cash flow, and other key metrics so organizations can understand potential future performance and make informed decisions. Budgeting focuses on creating a financial plan for a specific period (usually a fiscal year), setting targets, allocating resources, and creating a roadmap to guide decision-making. 

• What are the 4 types of budgets?

  +

  The 4 main types of budgeting are Incremental, activity-based, value-prop, and zero-based

   

  Incremental budgeting is when small percentage-based changes are made to the prior period's budget information (typically from the last 12 months) rather than yearly creating an entirely new spending plan.

   

  Activity-based budgeting is a top-down method where the FP&A team allocates resources based on the activities that need to be done, considering the cost of materials, labor, and other expenses associated with each activity. It's used for streamlining costs by analyzing each action a company takes.

   

  Value-proposition budgeting is a method in which companies analyze the cost versus benefit to identify which activities provide the most value and where resources should be allocated.

   

  Zero-based budgeting uses a bottom-up method where all expenses must be justified for each new period. Every expense is analyzed and allocated based on its contribution to the organization's objectives.

• How is forecasting used in budgeting?

  +
  In forecasting, organizations review historical data, market insights, and project future performance. This motion is essential in budgeting as it helps organizations estimate future revenue, project expenses, and monitor performance, which are crucial in developing more accurate budgets that align with organizational goals and resource allocation.

• What are the 4 basic forecasting methods?

  +

  The four basic forecasting methods are straight-line, moving average, simple linear regressions, and multiple linear regression.

  Straight-line forecasting is for when a company shows consistent growth (or decline) over time and can show a simple snapshot of potential future performance.

  Moving average forecasting is used to understand underlying trends by smoothing out short-term fluctuations and highlighting potential long-term trends.

  Simple linear regression shows the relationship between a specific business driver and a financial outcome (ex: marketing spend and sales volume).

  Multiple linear regression takes that further and examines how numerous variables may affect the forecast. 

• How long does a typical annual budgeting and forecasting process take?

  +
  While annual budgeting and forecasting vary by organization, the process typically spans several months. There's much to juggle, from data gathering, preparation, and analysis to managing stakeholders. The process is often delayed due to manual processes but can be expedited through tools like Cube that accelerate data gathering and analysis with spreadsheet-native technology. Cube makes it easy to see your data in one place and collaborate with stakeholders.