When running a business, understanding the difference between financial forecasting and budgeting is essential. Get it wrong, and you could end up putting your business at risk.
Here is all you need to know to help understand the difference between forecasting and budgeting.
What is the financial forecast?
Financial forecasting is trying to predict what your business will look like financially in the future. Using pro forma financial statements, which are similar to financial statements that chart your company’s performance, will help make your predictions more accurate.
The pro forma statements you require to help you forecast are:
- Income Statement
- Cash Flow Statement
- Balance Sheet
These statements cover different time spans and will help you reach your goals, depending on what they are. If your financial forecast is for planning purposes, you should create pro forma statements covering 6 to 12 months in the future.
If, however, your forecast is being presented to lenders or investors, the statements should cover 1 to 3 years.
Difference between financial forecasting and budgeting
When budgeting for your business, you are planning to set money aside for certain costs. You will take into account your income and expenditure. The budget might be based on details from your financial forecast, but it’s different from the forecast.
While forecasting is a prediction, budgeting is a plan. When forecasting, you will see where your business is heading based on past performance and other factors. Using this information allows you to anticipate the future.
Budgeting, however, is a plan about what you are going to spend based on what your future finances look like – and that is your forecast.
For example, if the financial forecast predicts you will have an extra £10,000 in revenue next year, you may create a budget to invest some of that additional revenue. So, you may budget spend £2,000 on advertising, £2,000 on marketing and £2,000 on a new website. And you may decide to put the remaining £4,000 into savings for any unexpected expenditure.
What to do next
We will look further into financial forecasting in our next blog. We’ll explain how to create pro forma statements and what you need to do once you’ve created your forecast.
If you’re keen to get started and would like an accountant to help, you can contact our team today. Just contact us today.