Financial Planning Demystified: Navigating Forecast vs. Budget

Budgeting and financial forecasting may sound like the same thing, but they’re actually very different. Both are money tools companies use to help plot out the course of their business and stay on track financially. But they both have some key differences that you should understand.

If you’re opening your own business or a business owner in the planning stages for your next venture, you need to understand your company's expected performance, financial direction, and financial plan. Both budgeting and forecasting can help.

Here’s what you need to know about business budgets and financial forecasts.

What are business budgets?

When you build a budget for your company, you’re outlining the business’s expectations over a certain period of time, usually a quarter or a year. You’ll want to anticipate the business’s expected expenses, revenue, cash flow, debt, and potential debt reduction over this period.

In a nutshell, your budget outlines what your company hopes to accomplish over a set timeframe. You’ll then take this plan and compare it to your company’s actual results to see how your business's financial performance over this set period of time.

Business vs. personal budgets

A business budget works similarly to a personal budget. You plan out upcoming expenses, find ways to cut back, estimate your revenue (or income), and calculate any debt payments or savings endeavours.

You then track it against what you spent in real time. The main difference is that a business budget is tracking a company’s spending patterns while a personal budget is tracking an individual's spending habits.

What are financial forecasts?

A financial forecast projects your company’s potential financial future based on previous historical data. For example, if sales tend to go up every summer, your financial forecast will likely include this revenue bump in its estimation.

Your revenue forecasts look at a set of performance methods including your revenue growth rate, sales volume, conversion rates, and actual expenses.

When you plot out a financial forecast, you’re generally making some assumptions that might need to be adjusted. For instance, you may assume you’ll have a client’s business year round, but if the client leaves, you’ll need to adjust or find ways to make up for the lost revenue.

Financial forecasts are often performed weekly, monthly, bimonthly, quarterly and annually, depending on the company’s needs.

How financial forecasts leverage historical data

When planning our a financial forecast, you’ll need to rely heavily on past financial information, revenue patterns, and previous expenses. This data helps inform your company’s forecast, offering patterns in the money-earning and spending cycles to help ensure the predictions are more reliable.

Financial forecast vs. budget: What is the difference?

Both a budget and financial forecast analyzes money trends and is forward-looking. However, both of these financial measurements have some key differences.

Your company’s budget focuses on your business’s goals and plans for the future. Financial forecasting, however, helps you determine if you’ll be able to meet those goals within a set period of time. You also might revisit your financial forecasting more often, running it on a weekly, monthly, or bi-monthly basis to ensure you stay on track for your budgeting goals.

How your business budget can help your financial forecast

Since your budget estimates your company’s cash flow, expenses, and revenue, it can work in tandem with a company's financial forecasting. You’ll use your money forecast to gauge where your business is at now, see if you’re on track to maintain your budget, and help you if you decide to update your budget or pivot in a different direction.

Planning vs budgeting vs forecasting

There’s another business step that works with budgeting and financial forecasting called business planning. Your business plan details your company's main areas of opportunity. It might include factors like:

• Your products or services

• Market/industry competitive analysis

• Marketing strategies

• Target customers

• Financial plan

• Budget

Unlike your company’s budget or revenue forecast, the business plan is a broader, bigger picture document that lays out your company’s mission statement and overall business objectives. Your budget and financial forecasting, however, are slightly narrower and focused on set sections of time.

Forecasting methods

There are several different forecasting methods you can use to help measure your company’s finances and performance over time. They include:

Moving average method

This forecasting process uses the average or weighted average of your business’s financials during a previous month, quarter, or other time period, to better anticipate performance in a future period.

Simple linear regression

Also known as SLR, this forecasting method bases its predictions on one singular variable, like transportation costs. If your company’s success largely depends on one variable, this method may work best for you.

Multiple linear regression

If you need a slightly more involved approach, you can try the multiple linear regression forecasting process. This forecasting method relies on more than one variable to predict future performance. For instance, if you rely on third party vendors, you might account for inflation increases and gas prices in your forecasting method.

Budgeting methods

There are many different ways to draw up your business budget, but the most important step is to commit to building one. Most Canadians do not have their own personal budget, but leaving your business without one can cost you significantly in business losses, which may trickle into your individual finances.

Every business will create a budget differently depending on your needs. You can use a spreadsheet and start from scratch, or incorporate a business budgeting template. Or, you might want to use accounting software to help you, especially if you want to make tracking your expenses and cash flow easier during tax season.

You can also work with a financial advisor or qualified accountant to help manage your company's budget or offer financial advice.

Other tips that can help

If you’re just starting out with building your business, it’s a good idea to brush up on financial literacy steps to ensure your personal finances are intact. That means making sure your credit score is high enough to help you get approved for a business loan. If you're not sure where your credit score stands, KOHO offers free credit score access.

You should also put any funds you’re prepared to use for your business in a high interest savings account so they’ll earn a competitive interest rate while they’re sitting in your bank account. Make sure you look for a bank that has overdraft protection coverage and any other features you may want, like virtual card access or CDIC insurance.