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What's the difference between budgeting and financial forecasting?

Budgeting and financial forecasting are financial planning techniques that help business personnel in the decision-making process. Budgeting uses estimation to quantify the expectation of revenues a business wants to achieve for a future period, whereas financial forecasting is used to estimate the amount of revenues that will be achieved. Budgeting essentially lays out a plan for where a business wants to go, whereas financial forecasting indicates where the business is actually headed.

A budget estimates the amount of revenues and expenses a company may incur over a future period. Budgeting represents a business’ financial position, cash flows and goals. A company’s budget is usually 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.

On the other hand, financial forecasting estimates a company’s future financial outcomes by examining historical data. Financial forecasting allows management teams to anticipate end results based on previous financial data. Companies use financial forecasting to determine how they should allocate their budgets for a future period. Unlike budgeting, financial forecasting does not analyze the variance between financial forecasts and actual performance. Financial forecasts are updated regularly when there is a change in operations, inventory and business plan.

A management team can use financial forecasting and take immediate action based on the forecast data. Conversely, budgeting contains goals that may not be attainable due to changing market conditions. If a company uses budgeting to make decisions, the budget should be updated more frequently than one fiscal year so that there is some relationship to current market circumstances.

By Investopedia      Article from investopedia.com