Question

Write an abstract comparing forecasting to budgeting.

Answer 1

Budgeting quantifies the expectation of revenues that a business wants to achieve for a future period, whereas financial forecasting estimates the number of revenues that will be achieved in a future period.

Budgeting

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

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

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

While most budgets are created for an entire year, that is not a hard-and-fast rule. For some companies, management may need to be flexible and allow the budget to be adjusted throughout the year as business conditions change.

Financial Forecasting

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. Characteristics of financial forecasting include:

• Used to determine how companies should allocate their budgets for a future period. Unlike budgeting, financial forecasting does not analyze the variance between financial forecasts and actual performance.
• Regularly updated, perhaps monthly or quarterly, when there is a change in operations, inventory, and business plan.
• May be both short-term and long-term. For example, a company might have quarterly forecasts for revenue. 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.

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