BUDGETING & FORECASTING

Budgeting:

A budget is a quantified expectation for what a business wants to achieve. Its characteristics are:

  • The budget is a detailed representation of the future results, financial position, and cash flows that management wants the business to achieve during a certain period of
  • The budget may only be updated once a year, depending on how frequently senior management wants to revise information.
  • The budget is compared to actual results to determine variances from expected performance.
  • Management takes remedial steps to bring actual results back into line with the budget.
  • The budget to actual comparison can trigger changes in performance-based compensation paid to employees.

Forecasting:

  • The forecast is typically limited to major revenue and expense line item. There is usually no forecast for though cash flows may be forecasted.
  • The forecast is updated at regular intervals, perhaps monthly or quarterly.
  • The forecast may be used for short-term operational considerations, such as adjustments to staffing, inventory levels and the production plan.
  • There is no variance analysis that compares the forecast to actual results.
  • Changes in the forecast do not impact performance-based compensation paid to employees.