Budget and forecast though used interchangeably are technically different. These two decision making processes are distinctive but are dependent on one another. Budgeting is a monetary exercise for materializing a plan. Forecasting is estimation of results based on current circumstances and past experiences.
Both budgeting and forecasting are accounting tools that help in setting and achieving business goals. Budgeting as a process helps in managing the future course of action, while forecasting as a tool projects this future course. Forecasting could be considered as educated guesswork, while budgeting is an objective that changes once every year. A budget has two expense components: fixed and variable. Fixed costs include rent, leasing fees if any, insurance premium and any other costs that are fixed in nature. Variable components include wages, telephone bills, electricity charges, and all similar components. Forecasting depends on industry reports and economic data while budgeting is dependent on recent performance.
Characteristics of a Budget
A budget is a mandatory accounting procedure for commercial as well as non-commercial organizations. It is a financial representation of a company’s annual earnings and expenses. A budget is an ‘intention’ which is required to be followed. It is a financial target that is set every year and all activities are tuned to achieve this result. It sets the path of business of a commercial entity or activities of a non-commercial organization. A budget is an annual exercise and is needed to be done every year.