One of the main objectives of every business house is to earn a satisfactory return on investment. It requires the production and selling a sufficient quantity of merchandise at costs and prices which will yield the desired profit. To remove the uncertainty element from the efforts and read future as exactly as possible, the management of every business house makes forecasts and formulates budgets.
Budgeting and Forecasting both are two important aspects of budgetary control. Hence it is important to recognize the difference between Budgeting and Forecasting.
Meaning of a Forecasting : A forecast is the best estimate made at a point of time as to what will happen tomorrow. Forecasting refers to the process of making forecasts. Forecasting refers to a systematic analysis of past and present circumstances with the aim of drawing conclusions about the future course of events. Mc Farland has defined Forecast in the following words-
Forecasts are production or estimates of the change, if any, in characteristics economic phenomena which may affect one’s business plans.
Thus, forecasting is a systematic effort to peep into the future. No forecast can be made without a proper knowledge of current circumstances. A business manager makes different types of forecasts for example, sales forecast, working capital forecast, demand forecast for example, production forecast etc. A sales forecast is an estimate of future sales and so on.
Meaning of a budget: When a forecast a reduced into black and white and approved by the management as a sort of commitment, it becomes a budget. Thus, a forecast and a budget are identical at the commencement of the budget period. In another words, a forecast is the preliminary step in the process of budgeting. For example, a sales forecast is an estimate of future sales while a sales budget is a commitment to attain a particular label of sales at a given price. Here are three important differences between a forecast and a budget.
Difference Between Budgeting and Forecasting
(a) A forecast is only a tentative estimate. It can be revised as soon as more recent data are available, a budget remains unchanged for the whole of the budget period, except for changes in activity level when budget allowances are called for.
(b) A forecast is not used for evaluating the efficiency of performance while a budget is always used for this purpose. The difference between budget figure and an actual figure is known as ‘budget variance‘.
(c) A forecast is a passive statement which reflects future on the basis of current conditions. But a budget should reflect the positive actions that management plans to take in order to influence future events.
