The Beginners Guide to Budgeting and Forecasting

Prophix Jul 10, 2023, 2:24:00 AM

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Organizations around the world have been budgeting for decades, solidifying budgeting’s position as a foundational process.

Forecasting is another critical process for finance teams, which has been supported by the proliferation of Financial Performance Management (FPM) or Corporate Performance Management (CPM) platforms.

It’s beneficial to understand the key differences between budgeting vs forecasting, and how to use both processes to benefit your organization.

What is budgeting?

Budgeting is the process by which organizations estimate revenue and expenses over a specific period and decide how to allocate that money.

Educba defines a budget as, “a detailed statement of expected revenues and expenditure which quantifies the tactical plans of the management to reach a desired goal for the company during a specified period.”

Budgeting can be a manual, time-consuming task if you don’t have the automated systems and processes in place.

Budgeting in a spreadsheet is hard to manage—from version control to ensuring the data you are using is up to date. There are challenges in bringing your data together from disparate systems and collecting, merging, and consolidating that data into a spreadsheet without any copy and paste errors. And lastly, no one wants to spend their evenings and weekends re-doing a budget due to inaccurate or incomplete data, or broken formulas.

Budgeting is an opportunity for decision-makers to collaborate and discuss their long-term strategic vision for the company, by taking a holistic look at the company’s competitive and financial position.

Budgeting is also an opportunity to identify the most profitable areas of your company and make decisions about where to allocate resources in the upcoming fiscal year. Cash allocation is a key part of the corporate budget, as it forces management to consider whether to invest in fixed assets or working capital. These are only a few of the benefits of budgeting, but broadly speaking, assembling a budget is an opportune time to take a long view of your business and discuss strategic objectives.

We cover all the common challenges of budgeting and forecasting in our whitepaper – download now.

With a financial performance platform, you can bring all your important financial data together in one place to plan and budget.

Three benefits of a budgeting platform include:

• Greater speed and accuracy with up-to-date data all in one place to make budgeting decisions
• Assign owners and approvers for alignment and collaboration in real-time—no more downloading .xls files to send via emai
• Create custom templates that prevent accidental data entry so you can rest assured you’re using accurate, error-free data

However, budgeting is often done at the beginning of the fiscal year, which means it can quickly become outdated. For this reason, many companies choose to create and maintain a forecast to better reflect their finances in real-time.

What is forecasting?

Forecasting estimates the revenue that your business will achieve in a future period. Forecasting takes into consideration your past performance, current performance, and additional relevant information.

Forecasting has gained a lot of attention in recent years, predominately as a complement to budgeting, which quantifies the revenue your business wants to achieve.

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Forecasting, done at regular intervals throughout the year, can help you adjust your goals to reflect company or market changes, as originally set out in your budget. Additionally, financial forecasting is sometimes used as a complete replacement for budgeting.

Forecasting requirements are diverse depending on the needs of your business.

Two approaches to financial forecasting

• Dynamic forecasting is a flexible approach that combines your data with detailed assumptions about how things will change. Assumptions are generally based on economic impacts (interest rates, inflation), factors that impact a given market, and other outside elements that could affect the business. Given the aforementioned items are variable in nature and outside of an organization’s control, dynamic forecasting allows you to adapt and become more agile to meet change and manage the impact. Dynamic forecasting is also sometimes referred to as rolling forecasting, which predicts future performance over a continuous period, based on historical data.
  
• Static forecasting is an approach that incorporates your existing data, without accounting for external variables. Static forecasting assumes there will be minimal changes to your business, aside from the variable you are forecasting for. Static forecasts are not traditionally updated more than once, making the process more like budgeting. Generally speaking, static forecasts capture a moment in time, while dynamic forecasts are versatile, living documents.

The diversity of forecasts also means that you can focus on what matters to your business, like cash flow, production, sales, or finance, and use a timeline that’s right for you, whether that’s days, weeks, months, or years. These forecasts can be quickly adapted to account for rapidly changing factors like interest rates, currency rates, production levels, and payment terms.

Three benefits of a financial forecasting platform include:

• Update your rolling forecasts with current data that reflects even the smallest changes
• See actuals, historical forecasts, carry-forward capabilities, and apply assumptions - all in one place
• Save yourself time by automating data collection from multiple sources so you can efficiently create accurate forecasts that quantify trends and realities

But what’s missing from many forecasts is a focus on long-term strategic goals. Inherent in the budgeting process is time for various departments, teams, and leadership to sit down and discuss their vision for the company in the next year. Without this strategic vision, it can be difficult for staff to regularly make knowledgeable decisions that support the company’s growth.

What’s the difference between budgeting and forecasting?

Budgeting captures your company’s allocation for spending for a given period. Budgeting is based on your company's current financial position.

Forecasts are an estimate of your financial future, typically based on historical data and trends. Forecasts are used to determine how you should allocate your budget. 

Educba’s infographic does an excellent job of summarizing the differences between budgeting vs forecasting, as discussed above.

In short, a budget reflects where management wants to take the company now; a forecast is a reflection of where the company is headed in the future. 

No matter your organization’s preference, there are benefits and considerations to both budgeting and forecasting. 

If your finance department relies primarily on a budget to guide their decision-making, it should be updated more than once per fiscal year so that it accurately reflects changing market conditions and company objectives. With a budgeting platform, this can be done with greater speed and accuracy.

If you conduct financial forecasting, your management team should be aligned on their long-term goals and strategic vision for the company, so that everyone can make decisions with the same end-goal in mind. With a forecasting platform, this can be done collaboratively with up-to-date data.

Regardless of whether your company prefers budgeting or forecasting, your processes are only as good as the data used to compile them. Organizations that use a Financial Performance Management (FPM) or a Corporate Performance Management (CPM) platform are better positioned to automate their budgeting and forecasting processes. With reliable data centralized in one location, companies can trust both their budget and forecast, and spend more time analyzing the results.

Unlock your potential for growth with accurate and comprehensive forecasts – see how in our whitepaper.

This post was originally published in June 2020 and has been updated for comprehensiveness.

Prophix

Ambitious finance leaders engage with Prophix to drive progress and do their best work. Leveraging Prophix One, a Financial Performance Platform, to improve the speed and accuracy of decision-making within a harmonized user experience, global finance teams are empowered to step into the next generation of finance with no reservation. 

 Crush complexity, reduce uncertainty, and illuminate data with access to best-in-class automated insights and planning, budgeting, forecasting, reporting, and consolidation functionalities. Prophix is a private company, backed by Hg Capital, a leading investor in software and services businesses. More than 3,000 active customers across the globe rely on Prophix to achieve organizational success.

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