What are Budget and Forecast?

What is budget?

The term budget means budget, that is, the financial planning and estimate of a company’s revenues, expenses and investments.

Budgeting (that is, the act of making a budget) is important because it outlines the company’s objectives, allowing adjustment measures to be taken to achieve the stipulated goals.

Imported from English, the term budget became popular with the installation of multinational companies. Although the translation of budget is simply “budget”, in the corporate world, the meaning of budget corresponds more specifically to the static type budget.

The corporate static budget is one in which the forecast data cannot be changed when they are already running, even if unforeseen events occur. For example, if a company fixes a volume of production or sales in its budget, it will not be able to adjust the targets during the year even if there are some changes in the market.

Despite the lack of flexibility, budgeting is quite popular among large organizations, especially multinationals. This is because the method facilitates the consolidation of the budgets of all units of the company, which are often spread over several countries, in a single general budget.

Although the forecast is strict, companies use mechanisms to bring the budget closer to reality. Each month, the budget is reviewed to compare the forecasted values ​​with the realized values. Based on this analysis, the forecast is made, that is, the budget review for the following months taking into account the values ​​actually realized. The budget and forecast is one of the most popular methods of business budget.

Budget and Forecast

The budget and forecast is one of the most popular methods of business budget. It consists of the elaboration of a static budget, which outlines the goals and objectives of a company for a certain period. This budget, during its execution, is adjusted through forecasts.

The forecast spreadsheet is usually prepared monthly and compares the projected values ​​in the budget to those actually made in the month. From the comparison, the values ​​that need to be reached in the following months are calculated, until the end of the execution period, so that the objectives outlined in the initial budget can be met.

Example of using budget and forecast

We assume that the budget of a company foresees to disburse US $ 2,000 per month with a certain expense. In the year, therefore, this expense should total US $ 24 thousand.

However, after six months of budget execution, the company made an analysis of the amounts actually spent and found that it spent US $ 18 thousand on this item, instead of the expected US $ 12 thousand.

To keep track of the accounts and meet its goal at the end of the year, the company can use a forecast spreadsheet. Also known as adjusted budget, the forecast calculates how much the company will be able to spend per month until the end of the year to meet its objective.

In the example above, as there is only US $ 6,000 left to reach the annual goal, the company will have to adjust the monthly expenditure forecast to US $ 1,000. In other words, it will need to reduce this expense to half the amount initially forecasted if it does not want to blow its budget.

Rolling budget and rolling forecast

For some companies, especially those that operate in activities that require rapid process changes or work with products with a short life cycle, the lack of flexibility in the traditional budget can affect their business.

In this case, one of the models adopted is the rolling budget and forecast, that is, a continuous or flexible budget. It foresees that expenses and revenues are analyzed in detail at intervals stipulated throughout the execution, for the elaboration of adjusted budgets for the following periods.

These revisions cannot be confused with the adjustment of the traditional budget through the forecast. The difference is that the static budget stipulates a fixed deadline, and its execution works as a “countdown”. When the term ends, another entirely new budget is made for the following period.

In the case of the rolling budget, at each revision, the term is renewed. That is, the revised budgets will always have the same duration as the initial budget (normally 12 months).

For example, a revised budget that goes into effect in April should make predictions by March of the following year. Should this budget be revised in August, the new projections will reach until July. For this reason, the rolling budget can also be called a perpetual budget.