Budgeting vs. Forecasting for Small Businesses

For many small to mid-sized businesses, the pending close to the calendar year parallels the close of the fiscal year. Businesses begin budgeting and forecasting for the subsequent annual period. “Budgets” and “forecasts” become forefront in everyone’s minds. The terms often are applied interchangeably, yet both serve very distinct but essential functions. Budgets and forecasts work best when applied in conjunction with each other.

Budgets- A budget is a defined set of financial objectives that designate where a business needs to be. It guides a business in its financial decision making by acting as a control measure in maintaining financial solvency, as well as establishing growth objectives. Typically, a budget is created prior to the beginning of a company’s fiscal year and is a static document.

The budget preparation process can be lengthy and complicated, as it must represent the overall financial objectives of the company, incorporate upper management’s input, and include realistic, attainable, cross-departmental goals. It assists in holding departments and managers accountable by establishing clear corporate objectives.

Forecasts- A forecast is an ongoing assessment of “actuals” so that a business can evaluate where they stand based on their established budget. It allows companies to plan and account for fluctuations in their operations due to changing market conditions or unforeseen circumstances. A budget represents where a business needs to be, whereas a forecast represents where the business actually is.

Forecasts are performed frequently (often monthly) and should incorporate scenario planning to predict best case scenario, worst case scenario, and most likely scenario. Forecasting helps businesses make adjustments in their operations so that they are not caught off guard by a cash flow deficit, which could have huge, negative implications for a small business.

Both budgeting and forecasting are essential practices for any business. However, they are critical to small to mid-sized companies which can be impacted more dramatically than larger companies by seemingly minor fluctuations in expected revenue or expenses. Whereas a large corporation may be able to absorb some variance, small to mid-sized business are more sensitive to these fluctuations which could have a greater impact.

We are currently offering a free analysis of your business processes, including the budgeting and forecasting process. If you would like to learn more on how Analytix Solutions can help move your business forward, please call me directly at 781.503.9004 or email me at sales@analytix.com

Satish Patel, CPA
President, Analytix Solutions
Satish Patel, Founder-CEO of Analytix Solutions, has more than two decades of experience as a CPA. He has also advised small and mid-sized businesses on diverse matters such as valuation, accounting, and finance. His experience extends to raising capital and arranging for finance from angel investors.

Written by

Analytix Editorial Team