budgeting vs business plan

What Is the Difference Between Planning, Budgeting and Forecasting?

Businesses require a lot of strategic planning and numbers-crunching. Companies make use of planning, budgeting and forecasting to map out the present and envision the future. Although all three of these functions have their place in running a small business and help owners guide the operations, they each play distinct roles.

Planning in Business

Planning is usually the first step in setting up a small business, and continues to be used as goals progress. Planning could be something simple like building your daily agenda, or long-range enough to envision where you want to see your business in five or 10 years. Some planning is done by the seat of the pants, with little more raw data than your vision for the business.

But as more information is available, the planning focus sharpens, according to Free Management Library. Once the business idea takes shape, you might put together a more formal business plan to outline who your customers are, where you plan to make your money and how you intend to attract new customers. Planning ultimately helps your business more efficiently use resources and set the optimal trajectory for future operations.

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Businesses set up how they will spend money with a budget. Budgets determine how existing financial resources are allocated. Budgets are usually set by how previous money was spent and expected income. The budgets often dictate how much is spent toward payroll, supplies and advertising expenses.

Budgets tend to be closer to real-life action. While a plan or forecast can be wrong, an error-ridden budget invites financial disaster. Most companies set their budgets at the beginning of a calendar or fiscal year, and many leave some room for adjustment as revenues increase or decrease. Planning and budgeting go hand in hand.

Forecasting in Business

Once you get an idea of how much money you're making through your business, you can start long-term forecasting to determine what you might be able to do in the long term via a budgeting and forecasting process. A forecast is based on past and current business numbers, according to Pak Accounting.

Forecasts are rarely set in stone, though, so a budgeting and forecasting example would hardly do justice from one business and economy to the next. The forecast might be inaccurate, so it would be a mistake to base a budget on that. Far from being an exercise in futility, though, forecasting acts to serve as a basis for further planning. For the most accurate forecasting, you should consider factors external to your business, such as general industry trends and overall economic projections.

Using All Three

Budgeting, planning and forecasting are all useful tools when you run a business. It takes a plan to get things off the ground. The plan continues to serve through the life of the business. Budgeting works close to the operating side and determines how things will run in the present and immediate future. Forecasting, while every bit as uncertain as the future, can help clarify things far in advance for more effective and accurate planning.

• Pak Accountants: What is the Difference Between Budgeting and Forecasting?
• Free Management Library: Basic Overview of Various Strategic Planning Models

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Budget vs. Forecast: Key Differences You Need to Know

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For businesses, it’s critical to have an accurate budget and an accurate forecast. This is especially true of small businesses where a single accounting oversight can leave a business owner strapped for cash or, worse, having to let an employee go.

Are you scratching your head right now? If you have always thought of your business budget and your business forecast as one and the same, you’re not alone. Forecasts and budgets are two different, yet equally important, financial animals. Here's what you need to know.

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What's the difference between a budget vs. a forecast?

The difference between a budget and a forecast is that a business's budget is a plan that its management sets to determine how they want to grow the company. A budget doesn't predict what will happen but sets a plan for what the business owner wants to happen. A forecast, on the other hand, estimates the future financial progress and outcomes of the business. Management teams use historical data and growth rates to forecast what the business's financials will look like in the future.

Business budgets 101

A budget sums up a business's goals for the upcoming year. Think of it as a plan of action over a certain amount of time. In a budget, costs and revenue are input into a spreadsheet.

When it comes to creating a budget, remember that a budget should:

Consider the expected demand for products and services.

Take a company’s highest priorities and arrange the appropriate resources to cover those priorities.

Show potential problems early enough that a company can take action.

Have a baseline to show against the actual results.

Different types of budgets include:

Sales budget.

Production budget.

Marketing budget.

Project budget.

Why should you create a budget?

A budget is a key management tool for small business owners. When you think of budgets vs. forecasts, think of a budget as a plan: It helps you map out where you want to be in the next one, two, or five years.

You set your business budget with the help of your forecast (after all, you don't want to budget for financial growth that won't really happen based on historical performance), execute on your plan and compare your actual progress against what you planned for in your business budget.

Setting and sticking to a budget is a great way to make sure that your team is always investing in the things you've decided will make you successful and make real progress to that goal.

Forecasts 101

Forecasts are more abstract in the sense that they are working from historical data to project or predict what might happen in the future. They also look at current and future possibilities as a way of safeguarding a business.

Like we mentioned above, a budget uses these predictions in order to fiscally prepare should they happen. Following a budget is an obligation for a small business, while they are not obligated to follow a forecast. People divide forecasting into two different types:

Judgment forecasting —Judgment forecasting utilizes only your intuition and experience to surmise what might happen in the near future. It is best used when there is no historical data to work from like for new product launches.

Quantitative forecasting —This type of forecasting uses large amounts of data to derive the most likely situations that a small business might face. It relies on repeated patterns in order to come to its conclusions.

Using both judgment forecasting and quantitative forecasting allows a small business to get the most accurate take on what the fiscal year might bring.

We also recommended that you use at least two, ideally three forecasts. These different forecasts should account for the best possible growth, the worst possible growth and "okay" growth. Looking at this can help you understand just how fast you're growing.

Why should you use a forecast?

As we mentioned above, you don't want to waste time budgeting for financial and business growth that will never really happen. A forecast helps you ground your predictions in reality by taking past financial growth and projecting that growth in the future.

A forecast also helps you react to change in a way that a budget does not. For instance, if your business typically has a slow month, a forecast will show you that in the numbers. Or, if you have forecasted your growth based on retaining a large client and that client for some reason is no longer using your services, you can quickly adjust your forecast to compensate for the loss.

This article originally appeared on Fundera, a subsidiary of NerdWallet.

Jennifer Dunn also contributed to this article.

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• An Overview

Financial Forecasting

Key differences, special considerations.

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Budgeting vs. Financial Forecasting: What's the Difference?

David is comprehensively experienced in many facets of financial and legal research and publishing. As an Investopedia fact checker since 2020, he has validated over 1,100 articles on a wide range of financial and investment topics.

Budgeting vs. Financial Forecasting: An Overview

Budgeting and financial forecasting are tools that companies use to establish a plan for where management wants to take the business —budgeting—and whether it is heading in the right direction—financial forecasting.

Although budgeting and financial forecasting are often used together, distinct differences exist between the two concepts. Budgeting quantifies the expected revenues that a business wants to achieve for a future period. In contrast, financial forecasting estimates the amount of revenue or income achieved in a future period.

Key Takeaways

• Budgeting is the financial direction of where management wants to take the company.
• It helps quantify the expectation of revenues that a business wants to achieve for a future period.
• Financial forecasting tells whether the company is headed in the right direction, estimating the amount of revenue and income that will be achieved in the future.
• Budgeting creates a baseline to compare actual results to determine how the results vary from the expected performance.
• Financial forecasting is used to determine how companies should allocate their budgets for a future period.

A budget is an outline of expectations for what a company wants to achieve for a particular period, usually one year. Characteristics of budgeting include:

• Estimates of revenues and expenses
• Expected cash flows
• Expected debt reduction
• A budget is compared to actual results to calculate the variances between the two figures.

Budgeting represents a company's financial position, cash flow , and goals. A company's budget is typically re-evaluated periodically, usually once per fiscal year , depending on how management wants to update the information. Budgeting creates a baseline to compare actual results to determine how the results vary from the expected performance.

While most budgets are created for an entire year, that is not a hard-and-fast rule. For some companies, management may need to be flexible and allow the budget to be adjusted throughout the year as business conditions change.

Financial forecasting estimates a company's future financial outcomes by examining historical data. Financial forecasting allows management teams to anticipate results based on previous financial data. Characteristics of financial forecasting include: 

• Used to determine how companies should allocate their budgets for a future period. Unlike budgeting, financial forecasting does not analyze the variance between financial forecasts and actual performance.
• Regularly updated, perhaps monthly or quarterly, when there is a change in operations, inventory, and business plan
• Can be created for both the short term and long term. For example, a company might have quarterly forecasts for revenue. If a customer is lost to the competition, revenue forecasts might need to be updated.
• A management team can use financial forecasting and take immediate action based on the forecasted data.

Financial forecasting can help a management team make adjustments to production and inventory levels. Additionally, a long-term forecast might help a company's management team develop its business plan. 

A financial forecast is usually limited in scope, focusing on expense line items and major streams of revenue.

There are critical differences between budgeting and forecasting. For example, budgets are created to meet a goal, such as quarterly growth. Financial forecasting examines whether the budget's target will be met or not throughout the proposed timeline. The content of a budget and financial forecast is different—the former contains specific goals like the number of items to sell or the amount of money to earn. The latter shows the expectations of how the budget will be met.

A budget is made for a specific period and is usually based on past trends or experiences of the company. A financial forecast examines a company's current financial situation and uses the information to forecast whether or not a budget will be met. Financial forecasting may be done frequently while a budget is set for a specific time period and may not be done more than annually, biannually, or quarterly.

A budget outlines the direction management wants to take the company. A financial forecast is a report illustrating whether the company is reaching its budget goals and where it is heading in the future. 

Budgeting can sometimes contain goals that may not be attainable due to changing market conditions. If a company uses budgeting to make decisions, the budget should be flexible and updated more frequently than one fiscal year, which is a relationship to the prevailing market.

Budgeting and financial forecasting should work in tandem with each other. For example, both short-term and long-term financial forecasts could be used to help create and update a company's budget. A budget may not always be necessary during a fiscal year, although many companies make them. However, a financial forecast is relevant because the information it provides can highlight the need for action. In contrast, a budget may contain targets that cannot be accomplished if the budget is an overreach.

How Can a Budget Help With Financial Planning?

A budget can help set expectations for what a company wants to achieve during a period of time such as quarterly or annually, and it contains estimates of cash flow , revenues and expenses, and debt reduction. When the time period is over, the budget can be compared to the actual results.

What Comes First, a Budget or a Forecast?

Typically a budget is created before a financial forecast. A budget reveals the shape or direction of a company's finances, while the forecast tracks whether or not the company is meeting its financial goals as outlined in the budget. Long-term financial forecasting may be done without first having a budget, but it would likely use past key indicators from previous budgets.

What Are the Steps of Financial Forecasting?

When a company creates a financial forecast report, it will decide on a time frame for the forecast and then gather all past financial documents and necessary paperwork around the time frame. The report will document, monitor, and analyze critical data such as cash flow and income statements, and balance sheets.

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