The Difference Between Planning, Budgeting, and Forecasting
Reports tell you what happened in the past, but offer little insight into what is likely to happen in the future. Planning, Budgeting, and Forecasting were developed for that purpose.
First, you must ensure that your financial reporting is correctly set up and provides useful and reliable information on a monthly basis. However, reports tell you what happened in the past and say little about what is likely to happen in the future. For this, Planning, Budgeting, and Forecasting have been developed.
Planning is a tactical process in which the long-term direction of the company is defined. The result is a plan that shows, among other things, the company's financial objectives.
Budgeting is a way to allocate financial resources to various expenses, such as production, marketing, or general wages. In addition, it is a way to clarify commercial goals and monitor progress. Budgeting often includes estimates of income and expenses, as well as expected cash flow and debt position. This process is usually performed at the beginning of a new fiscal year. Subsequently, the budget is compared with actual financial statements every month to show variances and define any necessary actions.
For the Forecast, the most likely actual status for all types of revenue and costs must be reviewed every month. This latest estimation of reality provides information on whether adjustments are needed: for example, increasing production due to increased demand, or conversely, cutting costs. The question is therefore...