What is the difference between a budget and a forecast?

This is the second post of my series, Client's Top Questions Answered. The thought is that if my clients' have the question, then I'm sure many other business owner's do too! 

What is the difference between a budget and a forecast?

First off, let me start out by saying, the number one mistake business owner's make when budgeting is NOT HAVING A BUDGET!  You can read more of the Top 7 Budgeting Mistakes in my article here. Let's get into it.  A budget is something that is typically set on an annual basis.  The budget does not change once its set.  The purpose of a budget is to set a goal or an expectation for the year so that you can compare your actual results back to the benchmark.  If your benchmark keeps changing, its impossible to see your progress against your goal.

A forecast is very different.  It is not a benchmark or a goal.  Rather, it is a prediction of the future. The forecast can change as much as you want.  The forecast's purpose to estimate where your business is going compared to where you thought it would be (i.e. the budget). 

So do I do both?  How do the forecast and budget work together?

I thought you'd never ask! The best way to monitor your business's performance is to first create a budget for the year.  Ideally you would budget for next year (2015 for example) at the end of the current year (November/December 2014).  The budget should be locked and no changes made to it once its set. You can budget by month, by quarter, or just for the year in total.  Its up to you.  The more detailed your budget, the more insight you can get from it. This budget is your benchmark going into 2015.

Like I mentioned, you can forecast as much as you want.  As a rule of thumb, I like to forecast at least every quarter.  Lets say in March 2015, I look at the first 3 months of the year and I now think that we are going to have more sales than I originally budgeted.  I create the forecast to reflect his.  I can compare how I think I will end the year to my budget. 

Why is this important?

Budgeting and forecasting are so important because you can see how the decisions you make throughout the year impact your goals that you set at the beginning of the year - either positively or negatively.  Having a budget and continuously forecasting give your business direction.  If you have a good forecast, you can make informed financial decisions for your company.

Have more questions for me?  Shoot me an email (bforssell@mytrustedcfo.com) or contact me via my website, www.mytrustedcfo.com.  Maybe your question will be the subject of my next article!