The difference between a budget and a forecast

The key distinction between a budget and a forecast is that a budget lays out the arrangements for what a business needs to attain, whereas a forecast states its actual expectations for results, typically during a rather more summarized format.

In essence, a budget may be a quantified expectation for what a business needs to attain. Its characteristics are:

The budget may be a careful illustration of the longer term results, monetary position, and money flows that management needs the business to attain throughout an exact amount of your time.

The budget might solely be updated once a year, reckoning on however ofttimes senior management needs to revise info.

The budget is compared to actual results to work out variances from expected performance.

Management takes remedial steps to bring actual results back to the line with the budget.

The budget to actual comparison will trigger changes in performance-based compensation paid to workers.

Conversely, a forecast is decision associated degree estimate of what's going to truly be achieved. Its characteristics are:

The forecast is often restricted to major revenue and expense line things. there's typically no forecast for the monetary position, the' money flows are also forecasted.

The forecast is updated at regular intervals, maybe monthly or quarterly.
The forecast is also used for short operational issues, like changes to staffing, inventory levels, and also the production arrange.

There is no variance analysis that compares the forecast to actual results.
Changes within the forecast don't impact performance-based compensation paid to workers.

Thus, the key distinction between a budget and a forecast is that the budget may be a arrange for wherever business needs to travel, whereas a forecast is that the indication of wherever it's truly going.

Realistically, a lot of helpful of those tools is that the forecast, for it provides a short illustration of the particular circumstances during which a business finds itself. the knowledge during a forecast is wont to take immediate action. A budget, on the opposite hand, might contain targets that square measure merely not doable, or that market circumstance have modified such a lot that it's not informed decide to come through.

If a budget is to be used, it ought to a minimum of being updated a lot of ofttimes than once a year, so it bears some relationship to current market realities. The last purpose is of specific importance during a rapidly-changing market, wherever the assumptions wont to produce a budget is also rendered obsolete at intervals some months.

In short, a business continuously desires a forecast to reveal its current direction, whereas the employment of a budget isn't continuously necessary.

Source: accountingtools