Budget vs Forecast: What's the difference?
To run a successful eCommerce business, such as an Amazon FBA, you need to keep a tight rein on your finances. Especially, if you're hoping to sell your Amazon FBA business in the future. Having control and visibility over cash flow, stocking levels, and other key financial metrics empowers you to make informed decisions. Among these metrics, budgeting and forecasting are both essential analytical business practices that empower you to achieve growth and long-term success.
But aren’t they the same thing?
In a word, no. They’re different strategies that complement one another. Today, we’ll discuss the difference between budget and forecast so you can derive the most benefit out of each one.
What’s a Budget?
Let’s explore budget vs forecast. A budget is an in-depth financial document that demonstrates the financial position the company aims to achieve within a certain timeframe. It includes projected sales, cash flow, and expenditures for day-to-day operations during a designated period. It is always helpful to understand the details on what sales forecasting is, to better plan projected budgets. A sales forecast can be short- and long-term projections, and are used to inform a budget, which is typically a more near-term view of the company’s target financial position.
It charts the path the business will take and the strategies it will employ in order to achieve the desired financial outcome. Typically, a budget will include the following:
- A realistic cash flow projection
- A debt reduction plan
- Cash reserves
- Estimated revenue and expenses
A budget acts as a roadmap for how you’ll allocate your spending during a given month, quarter, or year; your expectations for how the business will do; and your desired financial outcome. In short, it's a control tool used for managing operational performance. In most cases, it functions over a short-term time horizon, no longer than a year.
After the designated time period ends, the budget is then used as a baseline, allowing you to compare it to the actual results to determine the variance and see whether your assumptions are aligned with reality. If they didn’t, your budget makes it easier to pinpoint where you came up short.
What Is a Financial Forecast?
While budgets and forecasts share some similarities, they aren’t the same thing. So, what is financial forecasting?
A financial forecast is a more flexible, big-picture tool. It uses historical data to project a company’s future financial outcomes over a longer period of time. In addition, it’s frequently updated to correspond to market trends and changes in the business plan.
In other words, it examines previous data sets, historical performance, as well as historical and ongoing market conditions or trends to develop projections.
While there are several types of forecasting methods like inventory forecasting and sales forecasting, the most common one is the three financial statement model, which relies upon the following documents:
- A profit & loss statement (P&L) – Also referred to as an income statement, a P&L demonstrates profitability over a certain time frame in terms of revenue, expenses, and income.
- Balance sheet – This calculation shows the company’s worth in relation to its assets, equities, and liabilities.
- Cash flow projection – By measuring the business’ cash influx and outflux over a given period, this projection elucidates a company’s financial health and liquidity.
These historical data sets are then combined with market experience and trends to paint a more comprehensive picture of the business and its place within the market.
What Are the Differences between Budget vs Forecast?
There are some key differences between a budget and a forecast. They include:
- Time frame – A budget is created for a shorter time period, whereas a forecast can be used for both the short- and long-term. That said, forecasts tend to be more focused on the grand scheme of things as opposed to the day-to-day operations.
- Flexibility – A forecast is a dynamic model that’s constantly changing in response to conditions on the ground, whereas a budget is static.
- Analysis – A budget is used both to project future outcomes and to look retrospectively. It lends itself to analysis to see the variance between expectations and outcomes. Because it's constantly updated, a forecast doesn’t compare the original model to the actual performance.
- Data usage – A budget is entirely based on transaction data. A forecast leverages historic data, external data, market conditions, and trends.
- Objectives – A budget is meant to identify areas for cost-cutting and business optimization. A forecast helps project a growth trajectory and the overarching strategies needed to achieve it.
Advantages for Amazon Businesses
On their own, both budgets and forecasts are useful tools. But they’re much more effective when used together. Therefore, to succeed in a highly saturated and competitive marketplace, sellers should take advantage of both in order to derive the following benefits:
- Make sound business decisions
- Optimize and recalibrate the business plan
- Measure the health and success of the company
- Identify opportunities
Building Your Budgets and Forecasts with Crystal
For eCommerce retailers, the question should never be “Should I do a budget or a forecast?” Both are equally important. Without one, the other suffers.
But building and analyzing either of these financial models is difficult, if not impossible, without the help of modern technology that can collate, analyze, and then provide the insights you need to act.
Enter Crystal. Our Amazon-approved application enables eCommerce businesses like yours to build and evaluate the budgets and forecasts you need to succeed.
Want to see how Crystal could give your operations a competitive advantage in a crowded marketplace? Sign up today to learn more.
CFI. 3 Statement Model. https://corporatefinanceinstitute.com/resources/knowledge/modeling/3-statement-model/