Budgeting and forecasting are two of the most important financial functions for a business of any size. Budgeting and forecasting are often linked together, as they should be, but they have distinct differences.

A budget is an outline of expectations for what a company wants to achieve for a particular period, usually one year.

Financial forecasting estimates a company's future financial outcomes by examining historical data. Financial forecasting allows management teams to anticipate results based on previous financial data.

Budget

Some of the characteristics of budgeting include:

Estimates of revenues and expenses for the year
Expected cash flows
Expected debt reduction
A budget is compared to actual results to calculate the variances between the two

Budgeting represents a company's financial position, cash flows and goals. A company's budget is usually re-evaluated periodically, usually once per fiscal year. Budgeting creates a baseline to compare actual results to determine how the results vary from the expected performance.

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Financial Forecast

Financial forecasting characteristics include:

Companies use financial forecasting to determine how they should allocate their budgets for a future period. Unlike budgeting, financial forecasting does not analyze the variance between financial forecasts and actual performance.
Financial forecasts are regularly updated, perhaps monthly or quarterly, when there's a change in operations, inventory, and business plan.
Forecasts can be both short-term and long-term. For example, a company might have quarterly forecasts for revenue. Also, if a customer is lost to the competition, revenue forecasts might need to be updated.
A management team can use financial forecasting and take immediate action based on the forecasted data.

Forecasts can help management make adjustments to production and inventory levels. Also, a long-term forecast might help a company's management develop its business plan.

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In Summary

While budgeting and forecasting are different functions, they are not mutually exclusive of each other. In fact, a good forecast feeds the development of a sound budget. During the year, comparing the most recent forecast to the budget for the rest of the period can help the company make needed adjustments to meet changing business conditions.