Budgeting is the process of setting revenue and expense targets for a specified period of time, with the budget that results from the process being used to plan and control the allocation of resources.
These resources include hiring people and spending money on operating expenses, as well as capital investments. Budgets can be made for a person, a family, an organization, a business, a government entity, a multinational organization, a department, or any organization that collects and spends money.
How Is Planning Different From Budgeting?
The terms “budgeting” and “planning” are often used synonymously, but there are some subtle differences. Planning tends to have a longer-term horizon than budgeting. For example, strategic planning is usually focused on setting a company or organization’s financial goals and targets for the next 3 to 5 years.
Operational planning is the process of transforming the strategic goals and objectives of the organization into tactical goals and objectives at the operating level of an organization. Operational plans should establish the activities and budgets for each part of the organization for the next 1 to 3 years. This can include sales plans, marketing plans, and manufacturing and supply chain plans. Then the operating plans become the basis and justification for annual operating budget requests.
Financial and operational budgeting, in most organizations, tends to focus on a shorter timeframe, such as the upcoming fiscal year, with specific details by month and quarter. And it’s in the annual budgeting process that top-down financial targets are aligned with the bottom-up operational budget requests to arrive at an overall budget for the entire organization.
What About Forecasting?
Forecasting is a process related to budgeting and planning. It uses accumulated historical data and management expectations about the future to predict financial outcomes for future months or years. One example of a common forecasting process in business is sales forecasting, which is often the basis for sales planning and budgeting.
Where historically activities such as sales forecasting were used mostly to set the initial budget for a fiscal year, many organizations today use periodic forecasts to update their budgets throughout the fiscal year. These periodic forecasts can occur bi-annually, quarterly, monthly, or even weekly. And a common technique now being adopted is referred to as a “rolling forecast.”
A rolling forecast is where organizations project future results based on a combination of actual YTD financial results and the original budget, or updated revenue and expense forecasts for future periods. The future forecast period can extend to the end of the fiscal year, but in most cases the rolling forecast period typically extends 4 to 6 quarters into the future.
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