What exactly is the difference between budgeting and forecasting? Well, firstly, a budget is what a company wants to achieve, whereas a forecast is what a company thinks it will actually achieve. Let's have a look at an example to try and explain it better. Here we have a budget budgeted costs for the first half of the year. This budget will have been set out prior to the six months starting, and it shows a cost of 10 in each of the months from January to June.
It's now the end of Feb, and we've got some actual figures. In January, we achieved a cost of nine, whereas in February we achieved a cost of 10. Those aren't actual figures and they will help us try and work out what's actually going to happen going forward. If I've now got an idea of what will actually happen, that enables me to come up with some new figures going forward, and they are the forecast figures. If our actual figures were nine and 10, we might assume that going forward a better figure could be 9.5 in each month. That gives us our forecast figures, and they are the ones in March, April, may, and June. You also might notice that the budget total figure for the six months was 60, whereas now our actual and forecast total figure is now 57.
It's very important though to point out that the budget itself is not changed. Otherwise, the budget provides no control. If employees knew that each month the budget was going to change, then they would be no incentive for them to control costs. Instead, they would get to the end of January, find that they spent 12. We put 12 in our budget for February find at the end of February that we spent 15.
Employees need an incentive to control their costs to work hard, efficiently, and productively For this reason, rewards such as bonuses are often linked to achievement versus the original budget, but companies do need to know where they think our figures are actually going. That's why full costs are given so that we don't get to the end of the six months and suddenly have a big shock as to what figures have actually been achieved.
