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Financialpreneur.com » 22.1 The difference between a forecast and a budget

22.1 The difference between a forecast and a budget

 A forecast looks the same as a plan or budget and the mechanics of putting a forecast together are the same as for a plan or budget. However a forecast is really quite different from a budget, principally because of the way it is used, and the data it contains. If you use them wisely forecasts will be the major tool in ensuring you never run out of cash.

Unlike a budget, a forecast is not intended to be a goal - it is more passive. A forecast is really just a vehicle to allow you to peer into the future and make predictions about what is likely to happen. The sales you put into a forecast will normally be those you believe you are most likely to make over the coming months.

The table below summarises the main differences between a budget and a forecast.

Budget
  • The financial expression of your target.
  • This is the course you have actively decided upon and set for yourself; it is your intention.
  • It is where you want to go.
  • It is normally prepared just once for each financial year.
Forecast
  • This is your latest expectation of what really will happen over the next few months, based on what is happening in your business now.
  • It is where you are going.
  • It is your financial radar.
  • Is most useful if prepared every month.

Your budget expresses your intentions - it is the course you have chosen and plotted to take you to your desired destination, just as the captain of a ship plots his course. Forecasts however are like a ship’s radar. Instead of telling you where you want to go, which is what your budget does, forecasts tell you where you are going.

To continue the ship analogy, the captain’s plotted course may show him that he wants to sail around a distant headland; however the ship’s radar may tell him that he is heading straight for the headland. What the captain wants to happen and what is going to happen are quite different. He needs to be aware of this so he can take corrective action.

Similarly your budget may show that you intend having say £300,000 (or £30,000, or whatever the figure is) in the bank six months from now, but your forecast may tell you that you are likely to have only £125,000 (or perhaps £10,000, or minus £20,000) if things continue as they are.

Every month you need to take a look ahead to see what’s coming up, so you can spot potential obstacles and avoid them, rather than sailing straight into them.

Running your business without a budget is like getting in your car and driving with no idea of where you are going or where you want to go. You are aimless. Running your business without forecasts is like putting a blanket over your car windscreen. You can’t see where you are going, or what is in front of you.

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