What’s the difference between a budget and a forecast?
Budgeting and forecasting are two of the most important financial tools for small businesses in Singapore. They each allow different measures of insight into where a business can expand and what the possibilities are.
A budget is what you would like to happen, while a forecast is a reflection of what might actually happen. As such they are very closely linked, but they are not the same, and each has a different impact on the business, route and projects over the financial period.
What’s a budget?
A budget showcases where you would like to be as a company over a certain financial period. You base the budget on the forecast of revenues and overhead costs. It is an important summary of business goals over a set period of time, typically a financial quarter or year,
Budgets are typically static and are usually set for a business’s financial year. However you can use it as a guideline and be flexible as conditions change. COVID-19 is a great example of an unprecedented and unexpected impact on businesses across Singapore, and the world, and how budgets need to be agile.
How businesses use budgets
A budget is a key management tool for any small business. You can use it to compare actual financial results with budgeted figures, to test your company’s performance and much more.
Your budget will show:
- The sales figures you would like to achieve.
- What you have to spend and how you plan to prioritise this.
- A point of comparison at the end of a period.
There are a few things to consider when creating your budget:
- Start with a realistic cash-flow projection.
- Differentiate between essential expenses.
- Build debt reduction in.
- Try to incorporate cash reserves into your budget.
What’s a forecast?
A forecast is another key management tool for any small business. It is an estimate of what your business may achieve, and typically looks at revenue and expenses.
Forecasts are important in helping achieve business goals, and can be used for short or long term projections. When starting a business you may find monthly or even weekly forecasts necessary but as you grow and expand, quarterly or yearly forecasts may become more common.
Overall, forecasts are an important tool. They help you make any necessary adjustments to your focus or spending, as much can change over the course of a year in a business.
The difference between a budget and forecast
A budget and forecast work together to inform a full and detailed picture of your business performance, areas of focus and weakness and where to adapt and improve.
Budgets can often be outdated, due to the fact they are set at the beginning of the financial year, and change market trends can heavily impact a business throughout the year.
A forecast is a more accurate reflection of where the business is at, typically due to the fact they are completed at more regular times and use recent business performance as overall metrics and measurements. They also usually take market trends and impact into account.
The key difference between the two is that a budget is what you would like to achieve and have happen whereas a forecast is a reflection of what will very likely happen.
Tracking your budget and forecast
Accounting software such as QuickBooks can help generate budgets and projections without much effort. This allows you to spend time on what matters most, identifying focus areas and areas to adapt in. Get your free trial today.