A budget is the financial plan you agreed. A forecast is your current best estimate of what will actually happen. They are not the same thing. One of the mistakes I see businesses make is changing the budget every time reality changes. Don’t. The fact that reality moved away from the budget is useful information, and comparing the two is what tells management why performance is off plan and what to do about it.
A budget is the financial plan you agreed. A forecast is your current best estimate of what will actually happen. They are not the same thing, and one of the mistakes I see businesses make is changing the budget every time reality moves. The fact that reality has moved away from the budget is exactly the information you want.
A budget establishes expectations for a defined period. It typically covers revenue, costs, headcount, capex, profit and cash. It helps allocate resources and establish accountability. Think of it as the answer to one question: what did we plan to do?
A forecast uses the latest information to estimate the likely outcome. It answers a different question: what do we now believe will happen? If the budget says £10m revenue but three months into the year the evidence suggests £8m, the forecast should say £8m. Pretending £10m is still going to happen does not protect the budget; it weakens decision-making.
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Because they answer different questions. The budget tells you what you committed to. The actual tells you what happened. The forecast tells you what you now expect. Put them together and management can ask why you are off plan, whether it recovers, what it does to cash, and what action to take. That is FP&A.
Yes, when material information changes. A major customer leaves. A large contract is delayed. Hiring accelerates. Prices change. Gross margin deteriorates. A new market launches. Funding is delayed. In each case the forecast should reflect what management knows today, not what the budget assumed months ago. But leave the budget where it is: it is the benchmark you are measuring against.
Instead of forecasting only to December, maintain a consistent forward-looking period, perhaps 12 or 18 months. As one month finishes, another gets added. That stops the strange situation where a company reaches October and only forecasts two months into the future. A rolling forecast keeps management looking a full year ahead at all times.
Do not turn forecasting into a monthly negotiation about what number management wants to see. A useful forecast is not optimistic or pessimistic. It is honest. If the answer is uncomfortable, that is usually when management needs it most.
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