A budget is a detailed financial plan that shows estimated revenues and expenses for a specific period, usually a year. It lists all expenses and revenues, organizes cash flow, establishes a payment process, and provides specific plans for savings, borrowing, spending and investments that a business plans to undertake within a specified time. It is an administrative action that seeks to exercise control over the company finances and resources whereas forecasting is part of strategic management exercise, allowing managers and planners to set goals.
Budgets may be of many types, such as:
- Sales budget, or estimates of future sales for the given period
- Production budget, or an estimate of the number of units to produce, to meet forecasts or sales goals, and the costs involved in such production activity
Cash budget, or a prediction of future cash receipts and expenditures
- Marketing budget, or an estimate of funds needed for promotion, advertising, and public relations
- Project budget, or an estimate of costs such as labor and materials required to undertake specific tasks
Business forecasting is making projections or predictions of expected revenues and sales. It involves the analysis of current and historical data and subjects them to statistical methods, managerial judgments, or other analysis to determine future trends. It sets expected results, which may or may not come to pass or be applied, and primarily finds use to increase profitability or sales rather than exercise control.
Both forecasting and budgeting are closely interrelated and inseparable. Very often, the forecast forms the basis on budgets, for the sales volume in budget depends on the forecast of expected sales. Conversely, forecasts can also serve as an updated budget or plan, revising the projections made in the budget owing to passage of time.