What is Budget Forecasting?

The term “budget forecasting” is garnering a lot of attention lately. But the term itself can cause some confusion.While it’s not really a financial term, there are a number of industry practices that business owners could interpret as budget forecasting. Those defining it are pulling together several financial tools and processes to help us understand budget forecasting, which are all important elements to creating a complete financial picture for a company.

While companies may not find a budget forecasting definition, understanding things like budget versus actual analysis, reforecasting and scenario planning may help to fill the gaps that business owners are trying to wrap their heads around when they think of budget forecasting.Budget vs Actual Analysis.

A budget is familiar to anyone with a bank account, and certainly to even the smallest of organizations. Planning expenses against projected income drives businesses to meet operational needs while earmarking resources to put toward company goals.Budgets, however, are based on previous performance and assumptions. It’s uncommon for two years of a business to be exactly the same, or for every assumption to bear fruit. This is why analyzing your actual expenditures and income – a budget versus actual analysis – is important.So how exactly does budget forecasting come in here? While budgets may be done infrequently – many companies still adhere to an annual budget plan – a budget versus actual analysis can, and should, occur more regularly so that course corrections can be made.For those looking to understand a “budget forecast”, budget versus actual analysis may be part of the puzzle. A review of your budget’s performance will clarify where variances exist and forecast how budgets may need to change to continue to meet business needs.

Scenario Planning

Scenario planning is another process that may be misunderstood to be budget forecasting. There is a predictive element to scenario planning that could be conflated with forecasting.

Scenario planning – or “what-if” planning – models different financial potentials based on a set of assumptions. For instance, one scenario may be very similar to a company’s annual budget, leveraging previous performance and anticipated revenue to lay out a plan.Yet another scenario could be created to illustrate financials in a “worst case” situation like if a large anticipated contract falls through, sales fall short, or production overrun cannot be sold off. A third scenario might be a “best case” version, the flip of the worst case.The combination of these what-if scenarios could create a map forward, a kind of “budget forecast” for a company to follow. Essentially  a kind of budget forecasting is done when finance teams put together what-if scenarios and lay out a plan or budget for each scenario.

Reforecasting

Sometimes called “budget flexing,” reforecasting is a third budget process that may get incorrectly labeled as budget forecasting. Reforecasting goes hand in hand with budget versus actual analysis and can leverage scenario planning to keep companies on track.In reforecasting, companies revisit their budget to adjust projected revenues and expenses. Reforecasting provides an opportunity for organizations to take advantage of a changing competitive landscape and adjust to accommodate significant divergence from an annual budget.

A Final Note on Budget Forecasting

When combined, these processes could be seen as a type of budget forecast, despite that term being a constructed one. Companies can put these processes or “budget forecasting techniques” into practice to help with getting a clearer financial picture of the business.There are two very important takeaways from a high-level look at these three processes:

• First, an examination of budget versus actual analysis, scenario planning, and reforecasting make clear that these three processes can work well in concert together and provide what companies might be looking for with “budget forecasting”.
• Second, it’s obvious that companies looking to gain better control of their financial outlook need tools that streamline all three of these processes to make them more accessible to organizations of all sizes.