A budget typically sets out a company’s planned revenues and expenses for a fiscal year. Budgets are usually static and prepared once before the beginning of the year – it is a “stake in the ground” against which future results are measured. A budget is accurate only on the day it is created, because it is based on assumptions about future events which may or may not come true.
Actual results are compared to month and year-to-date budgets throughout the year, and the differences or “variances” are analyzed. This analysis is then used to inform management where action may be necessary to bring the organization’s financial results back on course.
A forecast is management’s best estimate as to where the organization is headed. It gives management visibility into what the organization’s revenue, expenses and net income is likely to be for the entire fiscal year, based on actuals to date and a best estimate for the remaining months of the year. It may be prepared or revised multiple times during the year as new information becomes available. While an organization may have a single annual budget, it may choose to update its forecast every month or every quarter.
Forecasted results for the year may be compared against budget each month. Those accounts with material variances should be analyzed, the reasons for the variances understood, and corrective actions taken if necessary.
A Powerful Combination
Forecasts and budgets are two of the most important financial tools in an organization. They serve different purposes, but when used together are a powerful aid to understanding an organization’s performance to date and future direction. Budgets should be established before the start of the fiscal year, and forecasts updated and compared against budget throughout the year. Forecasted information can also be used in the development of the following year’s budget.
Find out more about budgeting or forecasting best practices – call me and we can have a conversation. We can also talk about improving operating efficiency, reducing costs and strengthening your organization. Reach me at 613-727-1230 ext. 212 or send me an email to email@example.com
Richard MacNeill, FCPA, FCMA, CMC, Dipl. T. is a partner at OTUS Group, a team of advisors to business, government and not-for-profit organizations.