Budgeting and forecasting are financial tools that can shift the trajectory of your business. Both tools can be used to plan and monitor your financial performance.
The argument is whether they serve the same purpose or if one is better than the other as it relates to maximizing profits and cash flow.
The terms budgeting and forecasting are used interchangeably, but I will explore the difference and identify which one is most important for your growing consulting firm in today's episode.
As you begin to understand and proactively manage your firm's financial health, both tools can and should be used. The proper way is to have one support the other, not substitute one for the other.
Let's unpack each tool to know the when, why, and how to use a budget and forecast in your firm.
WHAT IS BUDGET
A business's budget is a plan that a company sets to determine how they desire to grow. A budget clearly identities a business's financial goals for the upcoming month or year.
The budget is a plan of action over a period that tasks should accompany. The budget quantifies expectations for what your business desire to achieve.
With a budget, you identify the future financial position of the company. Ideally, you are focused on potential revenue earnings and expenses outcomes.
The budget may only be updated once or twice a year. At SYTP, we review and update our clients' budgets on the 1st of the year and after June 30th.
The budget is compared to actual results to determine variances from expected performance. The budget to actual comparison should future change.
The goal is to earn more revenue than you budgeted for and never to exceed your expense budget.
WHAT IS FORECAST
A forecast is an estimate or prediction of what your business will actually achieve.
Forecasts tend to be more strategic than budgets, providing you with a roadmap of where your business expects to go based on historical data and business drivers.
A forecast is NOT restricted to revenue and expenses. A forecast revenues all four money lines of business; revenue, cash flow, expenses, and profit.
A forecast is updated monthly, sometimes weekly, depending on the financial condition of the company.
The forecast may be used for short-term operational considerations, and there is no variance analysis.
What's the Difference Between a Budget vs. a Forecast?
The key difference between a budget and a forecast is that a budget is a plan for where the business expects to go, while a forecast states its actual expectations for results.
Budgets are intended to be an outline of the direction that management desires to take your business. Forecasts are reports that provide a more unambiguous indication of where the company is heading and whether it's reaching its goals and ambitions.
Why Should You Use a Forecast?
The more useful of the two is a forecast. A forecast also helps you be reactive to change in a way that a budget does not.
A business always needs a forecast to reveal its current direction, while a budget is not always necessary.
The unique part of virtual CFO services here at Say Yes To Profits is that we strategically use a budget and a rolling forecast to help our clients scale to 7-figures faster and smarter. This is included in the Say Yes To Profits Plan. Grab a preview copy of our plug-and-play plan by clicking the image below.