Budget and forecast: understand the difference and how to use them in financial management

The corporate world is full of words and expressions in other languages, especially English, that are incorporated into everyday life. This is the case of budget and forecast,

We have already mentioned that both are standard procedures for good money management.

So, how do these terms apply to corporate financial management? What is the difference between them in practice? Continue reading the article to understand each concept and learn how to use them to organize and monitor financial planning.

What is budget and forecast?

The meanings of budget and forecast are different, but they are integrated processes in financial management. Budget is the English term for budget, being the forecast of expenses for a given period, sector or project. The forecast is the review and adjustment (if necessary) of the forecast made .

Creating a company's annual budget is a process that most businesses do to set the amount for the following year, based on historical spending data and expected future expansion.

However, the definition is not limited to “guessing” or establishing a value that the board considers sufficient. The budget must be an objective resolution, defined based on a realistic analysis of the financial health of the business.

To make an accurate decision, the Finance manager, together with management, must evaluate the strategic financial planning at each cycle to remember the objectives established, which ones were achieved and the possible advances to keep the accounts in order.

By conducting the process in this way, the forecast becomes an essential complementary process, as the team monitors the budget for each sector, evaluating how each area is using the available budget.

Thus, based on the budget and forecast, the company can outline strategies to contain unnecessary expenses, provide feedback to managers to improve distribution and indicate when it is necessary to save in order not to exceed the total amount for the year.

What is the difference between budget and forecast?

In short, the difference is that the budget is the definition of the budget (annual, half-yearly, for a sector or project), and the forecast is the process that supervises the forecast, that is, it analyzes whether it is being well distributed and the adjustments to optimize the use of money .

Did you notice how the two processes complement each other? A company may have an established budget, but without forecasting and financial management tools , it is unlikely that money monitoring will be effective.

This is because it is essential that budget and forecast processes do not happen at the beginning of a year and are only evaluated at the end.

Imagine that you prepare an energy plan and define the budget for energy expenditure for the year, projecting significant savings, as your company has made several adjustments to reduce consumption.

However, at the end of the year, when evaluating the projection, it was concluded that the company exceeded its costs, indicating that the measures taken were inefficient and that there were expenses beyond what was planned.

In the annual financial cycle, the budget is the reference and does not change. The forecast, in turn, is a process that must be executed regularly to monitor and adjust what is necessary throughout a cycle to optimize money.

To achieve this, the financial area must follow structured processes, led by an up-to-date team, which actively seeks the best solutions to save money, monitor results and ensure an advantageous return on each investment.

How to use budget and forecast control in financial management?

Budget and forecast monitoring can help with business financial management, guiding analysis and improving predictability and decision-making. Below, we list how to use these processes in business management.

1. Improve the quality of financial management

Qualified financial management is crucial to the success of a company. Through strategic financial planning, year after year, it is possible to establish a realistic budget, making a forecast to monitor the economic situation.

Furthermore, the team can assess the impacts of market movements, the country's economy, consumer habits and other factors that affect the company's financial results.

2. Track income and expenses

Monitoring monthly income and expenses , such as cash flow, provides the basis for forecasting work, mainly because the data helps to precisely assess what is increasing spending in a sector, for example.

Another positive point is the organization of the company's accounts payable , keeping them up to date and indicating which ones can be reduced or optimized to improve financial performance.

3. Deepen knowledge about budget management

Defining the annual budget is not a random choice. It is based on the company's spending history, the influences of the market in which the business operates, projection analyses and the challenges that may arise.

Therefore, it is essential for companies to deepen their knowledge of budget management so that planning is realistic, adjustable and has a safety margin.

This way, managers avoid making risky decisions and remain alert to opportunities that may have good financial returns.