The creation of a budget is usually the first step in the forecasting process, and is one of the most important aspect of the business planning process. A budget provides a financial model of how the business might perform if certain strategies, events and plans are carried out over a period of time. Normally a budget is compared against actual results to determine variances from expected performance, and if required management can take remedial steps to bring actual results back into line.
A forecast is an estimate of what the business will actually achieve, and it is usually phased and updated monthly. Forecasts may be used for short-term operational considerations, such as adjustments to inventory levels, sale volumes, staffing requirements, and production plan. Forecast are commonly used to ascertain if the business will meet or exceed the expectations from the allocated budget. This information allows decision makers to set future goals, and identify trends that can be used to grade the business’ financial position
A budget is a great tool to assist planning the future and viability of the business. However a greater predictor of future behaviour is past behaviour or trends. The purpose of investing time to create a financial forecast is to predict the future based upon certain assumptions. In addition, use the past to defend those assumptions. Both tools are necessary for a business to be successful
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