To maintain a successful business, it is critical to have a deep understanding of your business's accounting. Without this knowledge, you will not be able to predict growth, adapt to mishaps, or obtain a long-term perspective. Today, we will share with you the difference between a budget vs. forecast in accounting and tips on how to create a successful budget.
What is a Budget?
Simply put, a budget is a goal. When you sit down in December to determine your master plan for the next year or the next five years, the budget is the overarching goal you are striving to achieve. It is a static concept that does not change.
Unfortunately, goals (i.e., your budget) rarely go according to the plan; obstacles can get thrown in the way, items get overlooked, the market could change, and much more. There are a million things that could push your original budget off course. When this happens, you have a forecast.
What is a Forecast?
When you have to adapt your original budget, the change is reflected in your forecast. Your forecast is a dynamic concept that adjusts as reality meets expectations. Let’s take a quick peek at an example to explain.
You want to climb a mountain. Your budget (i.e., goal) is to reach the summit. However, as you start climbing, you come across a large tree blocking your path. There is no way to continue on that exact path; therefore, you have to take a detour. That detour is the forecast. While your budget is still to reach the summit, your forecast takes every part of your journey into account.
What to Remember When Analyzing Your Budget vs. Forecast
Firstly, it is essential to remember that your budget and your forecast originate at the same point. From there, that’s when the changes can begin. Take a peek at the graph above. Your budget is represented by the purple line, a smooth and steady growth. We all know that the chances of business actually going that perfectly are slim to none and would more likely look like the pink line, the forecast.
Secondly, it is vital not to get discouraged. Often, one can feel disheartened when their budget doesn’t work out as planned, and their forecast looks like a ping pong tournament.
Remember, past results do not predict future outcomes. Your first budget is like a baby learning to walk. They stumble, they fall, but with practice, they will eventually learn to run. So, try not to be overwhelmed or frightened of creating a budget. We all have to start somewhere, and version one is better than version none.
Check out this article to understand the difference between Profits and Cash Flow.
Tips to Creating a Good Budget
When you first start creating budgets, you will likely feel overwhelmed, and that is completely normal. The best action you can take to achieve clarity and direction is to take the time to think your budget out. Write a list of every expense you can think of, contemplate what could go wrong and how you would adjust for it, and consider talking to similar businesses to gain perspective.
Additionally, expect that your outcome, in most cases, will not match your predictions at first. That is okay! Designing a budget takes time to create, and once it is set, it takes a while to get there. The goal is to get it as close as possible and keep improving over time as you learn.
Learn more with Oberlander & Co.
If you would like to learn more about business accounting and how you can create a successful budget, please check out our website or contact us for more information! Click here to learn more about our Virtual CFO services.