Master the art of budget and forecast in your business management

Budget and Forecast: What They Are, Differences, and How to Define Them

Budget and forecast are two terms that play a fundamental role in the landscape of business financial management, regardless of your company’s budget maturity stage.

This is because basing decisions on assumptions and guesses is a risky path, and the reality is that results don’t come like magic tricks.

In light of this, business management requires seriousness in all its phases, particularly in the crucial development of the budget and forecast.

However, it’s common to see debates about the effectiveness of this process in various organizations, especially among planning and finance professionals.

In the midst of these discussions, it’s frequent to encounter opinions labeling the budget as inflexible and even superfluous, simply because it is considered traditional.

But does this view represent reality? Let’s find out throughout this text!

What are budget and forecast?

Budget and forecast are two distinct but interconnected practices.

The term “budget” refers to a static budget, representing the planning of goals, expenses, costs, and expenditures over a specific period.

On the other hand, the “forecast” consists of the continuous adjustment of that budget whenever necessary.

Budget

The budget refers to the company’s budget prepared to plan costs and investments.

So, to explain what a budget means in the corporate world, we need to clarify that it functions as a forecast of the amounts that will be allocated to different areas of the organization over a specific period.

Companies typically develop a budget for semiannual or annual periods, although it’s also possible to create specific budgets for unique projects or particular sectors.

To illustrate, let’s use the example of a company organizing an event.

In collaboration with the finance team, a budget is established, determining the resources that can be allocated to the event.

Before defining this budget, research and studies are conducted to assess the project’s feasibility.

Thus, the budgeting process includes monitoring expenses to ensure compliance with what was previously established.

The goal is to control costs associated with the action so that they don’t exceed the total budget defined in the planning—in other words, not to surpass the budget itself.

Forecast

It’s practically impossible to discuss the budget without addressing the concept of a financial forecast, as this is the element that enables adjustments along the way.

Thus, when we talk about what a forecast is, we are referring to nothing more than the adapted budget.

In the scope of financial forecasting, annual planning is broken down into periods, usually monthly, providing close monitoring of the company’s cash flow projection.

This allows for continuous adjustments and course corrections, always aiming to achieve the expected result.

Through this monitoring, it becomes possible to anticipate potential cash flow problems or deal with the effects of market seasonality.

Therefore, financial forecasting emerges as a vital tool for strategic financial management.

What are budget and forecast used for?

Budget management plays a crucial role in guiding investments, requiring constant dialogues between the various sectors and company directors.

This practice aims to ensure proper investments, preventing losses to the company’s cash flow and avoiding a lack of capital for initiatives with positive return potential.

A survey conducted by KPMG, covering various companies from different sectors, provides interesting insights into these concepts.

According to the study, 53% of companies indicate that the time and effort invested in managing the budget are essential to ensure the execution of the financial strategic plan.

The other 47% of survey participants highlighted equally relevant reasons, such as:

• Measuring the organization’s performance

• Ensuring financial control

• Providing support in decision-making

• Assisting in the formulation of pricing strategies.

With this data in hand, it becomes clear what budget and forecast are used for, and it further underscores the importance of defining and managing the budget for each business action and sector.

Budget vs. Forecast: What are the Differences?

The difference between budget and forecast lies in the timing and flexibility of financial planning. Additionally, while the budget offers a more static view for the year, the forecast provides a dynamic and adaptable approach over time.

Characteristics of a Budget

In the budget, financial planning is conceived comprehensively, covering longer periods, such as an entire year.

Before its formulation, a comprehensive analysis of the scenarios is conducted, considering the company’s history, current market conditions, and future projections.

The goal is to establish a solid plan for the entire year.

Characteristics of a Forecast

In contrast, the forecast takes a more flexible and fragmented approach.

Financial planning is carried out by breaking down the budget into smaller periods, such as weekly or monthly.

This division allows for quick adjustments to the financial plan, enabling a faster response to changes in market conditions or the company’s internal dynamics.

Why have a Budget and Forecast?

Having both a budget and a forecast is crucial for effective financial management. The budget sets goals and directs resources for the annual plan, while the forecast allows for dynamic adjustments over time.

Together, they provide strategic vision and flexibility, enabling companies to anticipate challenges, adapt to changes, and optimize financial performance.

How to Create a Budget and Forecast?

Creating an effective budget and forecast requires a structured financial planning routine.

Initially, it is essential to extract necessary data, allowing for daily control and the ability to block purchases if they exceed the target.

This real-time control enables dynamic adjustments to the budget—in other words, the forecast.

The first step involves a detailed analysis of the previous period, providing insights to set expectations for the next period.

Subsequently, distributing goals—such as a 15% cost reduction—among the cost centers forms the budget.

The second step is to support the forecast by projecting these goals over 12 months, taking seasonal variations into account.

Periodic monitoring and reviews are essential, as they allow for continuous adjustments and ensure the process’s success.

How Can Mitra Help You?

As you have seen, both processes are essential for strategically allocating resources, projecting goals over time, and making dynamic adjustments to ensure adaptability and efficiency in responding to changes.

To make these procedures simpler for your business, you can rely on Mitra, a corporate software ready to streamline these processes by optimizing and facilitating scenario simulations and comparing what was planned versus what was accomplished.

Mitra is a comprehensive solution for boosting efficiency and operational excellence in your organization. Get to know it now.

Conclusion

The effective integration of budget and forecast plays a fundamental role in corporate financial management.

Through a structured financial planning routine, detailed analysis of the previous period provides crucial insights to set future expectations.

As you have seen throughout this article, distributing goals among cost centers and establishing the budget is essential for strategically directing resources.

Additionally, supporting the forecast by projecting goals over time allows for dynamic adjustments, ensuring adaptability and efficiency in responding to changes.

Furthermore, periodic monitoring, using tools like Mitra Sheet, promotes continuous reviews that are essential for comparing forecasts with results.

In summary, when budget and forecast are managed efficiently, they guide financial decision-making and drive operational efficiency and excellence, which are essential for sustained business success.