Budgeting and forecasting are both important tools used by owners and managers to prepare a plan for how they want the company to develop in the future. However, they are not two words for the same process.
Budgets (generally speaking) quantify the desired revenues and earnings the company wants to generate in a future period, while forecasts estimate actual revenues and earnings in the period – based on the company’s current circumstances.
This is naturally a gross simplification (it must be possible to break down both budgets and forecasts at different levels of the organisation), but the nuance is that the budget explains what management wants, while forecasts say whether the company is on track to satisfy these wishes.
Think of it as an expedition charting a course on a map. If you do not have any landmarks (or GPS co-ordinates) to navigate by along the way, you have no idea whether you are on course for your destination, when you will get there, or if you have enough supplies for the journey.
If your forecast shows that the company is not on track to meet budget, management must either adjust the budget or take measures to make achieving budget more realistic. This could involve incentivising the sales force, adjusting prices, tweaking the marketing, cutting costs or anything else that you think may have the desired effect.
In many ways this makes forecasts essential for businesses to meet their budgets. And we can confidently state: If you prepare your company’s budgets in Excel , it is almost impossible to prepare accurate forecasts. But don’t despair – there are tools that can make the budgeting process easier and better that also give you everything you need to prepare accurate forecasts.
If you use Excel to prepare budgets , you know how much work is required to import and check the quality of all the data, create formulas and define contexts. You also know how much can go wrong with this process – and that is before we start talking about different versions and integrity control when different people are involved in the budgetary process. If you struggle to do this once a year, just imagine having to do it every week, month or quarter!
The alternative is to use a budgeting tool to prepare your budget. Such tools can be connected to all the business’s systems and extract relevant data automatically. They check all relationships between the figures, and if any adjustments are necessary, the system takes care of all required prospective and retrospective updating of the figures, without the need for programming.
But another and perhaps just as important benefit is that this system is also much easier to use for forecasting (and for a few other things too). With a single click, the budget can be converted to a forecasting model and extract figures from the same systems that underpin the budgeting process. If there are any discrepancies between the budget and forecast, the board and management will want to know the cause of the discrepancy as soon as possible – and with this type of system you can inform them of precisely this – with a single mouse click.