See how these two financial tools are used to plan short- and long-term.

Budgeting and forecasting are both important for helping businesses plan and manage their finances, but each serves a different purpose. Here’s a quick overview of how these tools are used.

Key differences between budgeting and forecasting

Budgeting establishes what you expect to happen financially for a specific period, typically one year. Basic budget items include estimated revenue and expenses, cash flow and debt repayment. As you go through the year, you can see if you’re on track by comparing actual results to your budget goals.

Forecasting is a tool used to finesse financial planning and budgeting. It tracks historical data as well as factors expected to affect the future. For example, looking backward an increase in sales may indicate a need to add employees and increase funds for payroll. Looking forward, a business might need to adjust its purchasing budget in response to new tariffs.

Budgeting is about annual goals, identifying money coming in and allocating money going out.

Forecasting is about tracking financial performance to see if the business is meeting its budget goals and may be updated quarterly or even monthly as market conditions change.

Numerous software tools are available to simplify and automate budgeting and forecasting.

Budgeting and forecasting mistakes to avoid

A common budgeting mistake for new business owners is to underestimate expenses. Build your budget with a buffer that provides a bit of leeway if costs are higher than expected or revenues are lower.

When forecasting, examine multiple scenarios, not just the most optimistic. The U.S. Chamber of Commerce recommends creating best case, worst case and base case scenarios. By considering multiple possibilities, you help prepare your business for contingencies, like when you land that jumbo order or face unexpected expenses.

Business banking services to streamline financial planning

Effective budgeting and forecasting rely on having access to banking data. At Consumers, our business services make it simple to link your accounts to your software tools. To find out more, talk to a member of our business team.

 

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