Budget & Forecasting
The budget is a detailed representation of the future results, financial position, and cash flows that management wants the business to achieve during a certain period of time.
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Budget
- The budget is a detailed representation of the future results, financial position, and cash flows that management wants the business to achieve during a certain period of time.
- The budget may only be updated once a year, depending on how frequently senior management wants to revise information.
- The budget is compared to actual results to determine variances from expected performance.
- Management takes remedial steps to bring actual results back into line with the budget.
- The budget to actual comparison can trigger changes in performance-based compensation paid to employees.
Forecasting
- The forecast is typically limited to major revenue and expense line items. There is usually no forecast for financial position, though cash flows may be forecasted.
- The forecast is updated at regular intervals, perhaps monthly or quarterly.
- The forecast may be used for short-term operational considerations, such as adjustments to staffing, inventory levels, and the production plan.
- There is no variance analysis that compares the forecast to actual results.
- Changes in the forecast do not impact performance-based compensation paid to employees.
