What are Budgeting and Forecasting and how do they differ ?
A year ago, PRWS launched a new branch of services : business advisory. Since then, we have worked in cooperation with several clients to select with them the optimal solutions to their challenges and the best strategies to grow their businesses. Two aspects of any business model are crucial in the development of any company : Budgeting and forecasting since they put into numbers the goals of the owners and give a framework to the company.
What is Budgeting ?
Budgeting is the tool to help establish where you would like to go. It will allow you to estimate the future revenues and costs that the company will probably incur in the case of hiring a new sales manager for instance hence you will be able to steer the company in the right direction . At the end of the year you can then compare and analyse the budgeted amounts and the actual financial results and evaluate your performance.
A budget is not a tool to dream, it is a tool to achieve your goals. That is why the predictions need to be as accurate as they can be. After establishing the budget, you will need to review on a regular basis, once every quarter, your actual performance with the predicted one in order to readjust the malfunctioning part of the business.
What is Forecasting ?
Cash flow forecasting is the tool to stay on top of your finance as it indicates when money will move in and out of the bank and critically how much will remain at the end of each month. It includes tax, repayment of loans and dividends. Forecasting enables you to anticipate how future internal and external changes will impact both your profitability and balance sheet and therefore to make the adequate moves. In order to cover all the future perspectives, your accountant and you will create three different scenarios namely a pessimistic, an optimistic and a reasonable.
The cash flow forecasting can look out over several years or only for the year ahead, it only depends on your preference. But either way, this tool is great to anticipate upcoming cash shortages. By knowing so, you will be able to proactively manage your finances to always maintain a positive cash balance in your bank account. Of course, in business, things change quickly. That is why it's important to update your forecast on a regular basis to make sure you always know where your business is going.
What is the difference between budgeting and forecasting ?
As you now probably understand after reading the description of each tool, the difference between budgeting and forecasting is simple; the first one tells you where you would like to go and the second one where you can actually go. However, both are useful for all business owners who want to grow their company and have a healthy business.