Understanding the difference between a budget and forecast

Welcome to Business and Finance for Non-Accountance. My name is John Haven and I have been an accounting professional for over 25 years in both private industry and academia. This podcast is for people who have no desire to become accountants and honestly, good for you, the parties are terrible. But for people who want to understand financial statements well enough to use them in real life. Maybe you're taking a class and accounting feels like a foreign language. Maybe you're starting a business and want to know if you're actually making money. Maybe you just got promoted and someone handed you a budget and a profit and a loss report and smiled like that was going to be helpful. This is for you and yes, it's for those of you who are dating because comparing financial statements before you combine your lives is generally good due diligence. Love is blind but your net worth doesn't have to be. Today we're tackling a topic that makes a surprising number of people eyes glaze over. And yet it affects every single one of us in the workplace, the difference between a budget and a forecast. Now I know you're thinking are those not the same thing? And honestly that's a completely fair question. Most people use the words interchangeably like soda and pop or alligator and crocodile. They seem similar but if you stand close enough the difference matters a lot. So today we're going to break this down. No accounting degree required and hopefully a few laughs along the way. Let's dive in. Let's start with the budget. Think of a budget as your New Year's resolution for money. You sit down usually at the end of the previous year. You look at your goals. You think about what you want to accomplish and you write down a plan. You commit to it. You print it out. Maybe you even laminated. The budget says this is what we're going to spend and this is what we expect to bring in. This is the plan. Now here's the key part about a budget. It does not change. You set it once typically for the year and it becomes the official benchmark your measuring stick. It's the thing you compare reality against. In the business world, the budget usually requires sign off from leadership. It has to go through approvals. It is a commitment from top to bottom. Think of it like a contract with yourself or in this case with your company. In practice, building one can take two or three months of back and forth between departments and finance. It's a lot of work, which is exactly why no one wants to throw it out the window in April. So if the budget had $50,000 for marketing in Q2, that number stays at $50,000 all year. Even if the world turns upside down and you've already spent $75,000 by March, the budget doesn't blink. It just quietly judges you. And when leadership reviews the numbers and sees the gap, the questions start flying, what are we going to do about these variances? Where can we cut other places to get back on track? Is there a revenue opportunity we can accelerate to make up the difference? Not all budgets are created equal though. Something that a lot of people don't realize, there are actually several types of budgets. But every company builds the budget the same way. So let's walk through the main ones because knowing which type your company uses tells you a lot about how decisions are made. Incremental budgeting. Same as last year plus a little extra. This is the most common type and honestly, it's the easiest and most comfortable. You take last year's budget, add a percentage increase for things like inflation or growth and call it a day. Things like renewing your gym membership in January. Easy, familiar and something completely disconnected from reality because you haven't been there in a couple years. Pros. Fast, easy and familiar. Great for stabilized organizations or not much changes year over year. Cons. It can quietly carry forward bad spending habits. If a department wasted money last year, congratulations, they probably just got a 3% raise on that waste and will have more to waste this year. And if a department quietly becomes more efficient or even shrinks, the headcount and the payroll often stay frozen in place anyway. Nobody volunteers their own budget line on the chopping block. The opposite is called zero-based budgeting. Justify every dollar from scratch. No-based budgeting throws out last year's numbers entirely. Every department starts at zero and has to justify every dollar they're requesting. Nothing is assumed. Nothing is carried over automatically. It's like cleaning out your entire closet instead of just buying a new shelf. The pros, it forces real conversations about priorities. Great for cutting waste and realigning spending for current goals. Cons. It is extremely time consuming and can be exhausting for the teams. Imagine having to explain why you need office supplies every single year. Yes, we still use parents and pencils, Karen. It's good practice if you use incremental-based budgeting to go ahead and do a zero-based budget review every five or so years. Some companies will do a deep dive into different departments each year so that everybody eventually gets the zero-based treatment without doing it to everyone every year. There's also what's called activity-based budgeting. Budgeting based on what we actually do. Activity-based budgeting works backwards from your goals. You ask, "What activities do we need to accomplish on our targets and what will those activities cost?" Instead of starting with last year's spending, you start with this year's estimated outcomes. Think of it as building your grocery list based on the meals you're actually planning to cook. Those are tightly connected to spending the reality. You know exactly where every dollar is going. The cons require strong data and a clear picture of your operations. If your processes are a bit chaotic, this one can be really tough to pull off. We also have flexible budgeting. Our budget adjusts based on actual activities. A flexible budget changes based on your actual output or activity. If sales are higher than expected, the budget automatically scales spending up. If things slow down, it scales down. It's less of a fixed target and more of a formula. Pros - reflecting reality better than a rigid budget. Especially useful in manufacturing or sales-driven environments. Cons - way more complex to build and maintain. Not every cost is easy to flexibleize. The rent doesn't go down just because sales slipped. So which type does your company use? Honestly, many organizations use a combination. Most default to incremental because again, it's fast, it's familiar, and it's easy. As I mentioned, many layer in Periodic Zero-Based Dives every few years to keep things honest. Flexibility and activity-based approaches tend to require more sophisticated software and dedicated financial resources. So you're more likely to encounter them in larger organizations. The main takeaway - next time one of these terms comes up in a meeting, you'll know exactly which conversation you're in. So now, the forecast. All right. Now we know about budgets. Let's talk about that forecast and how they go together. If the budget is your New Year's resolution, the forecast is your weather app. The forecast is a living breathing, updated estimate of where you're actually headed. It takes into account what's already happened and says, "Okay, given where we are right now, where do you think we're going to end up?" Forecasts are updated regularly. Monthly, quarterly, some crazy people do it every week and fast-moving industries. That's not about what you planned. They're about reality. Here's a simple analogy. Let's say you're driving from Atlanta to New York. Your budget is the original Google Maps route you printed before you left the house. The forecast is what Google Maps is telling you right now, after you hit traffic in Charlotte. Took a detour in Virginia and your co-pilot insisted on stopping for Barber Q twice. The destination is the same, but the forecast is showing you the actual estimated time based on current traveling conditions and companions. So, in reflection, budgets are set once a year, usually. Based on goals and plans, they tend to be fixed. They don't change mid-year. And they're used for accountability. Did we stick to the plan? Forecasts are updated frequently. Based on current data and trends, they're flexible. They evolve as the business evolves. And they're used for decision making. What do we need to do now? The budget answers the question, what did we say we'd do? The forecast answered the question, what are we actually going to do? And here's the important part. You need both. They're not competitors. They work together. The budget keeps you honest and accountable. The forecast keeps you informed and agile. One more distinction worth noting. Forecasts tend to operate at a higher altitude. They focus on revenue and broad expense categories. Things like total S-GNA, not a line by line breakdown of every department's travel budget. Budgets, on the other hand, are where you get in the weeds, salaries, meals, entertainment, office supplies, the whole thing. If someone asks for a forecast, they want the big picture. If they handed you a budget template, bring a spreadsheet and some patience. Let's do a quick real-world example. Imagine you budgeted $1,200 for groceries this month. That's your plan. That's your budget. Now it's the 15th of the month and you've already spent $900. At this point, you're forecasting that by month then, you're going to spend around $1,800. That's your forecast. The budget is still $1,200. The budget hasn't changed, but the forecast is telling you, hey, you're about to blow this thing. Now you have a choice. Do you cut back for the second half of the month? Do you adjust your expectations? Do you eat out less? Do you quietly delete the budget app from your phone and pretend this conversation with yourself never happened? That's exactly what happens in businesses. The forecast gives leadership the heads up they need to make a decision. Not after the years over, but while there's still time to do something about it. The question becomes, what do we need to do to close the gap to get back to budget before your end? Why do you care about this if you're not in finance? Because both of these tools affect your work, whether you realize it or not. When your manager asks if a project can stay within budget, they're asking about the original plan. When someone asks for a forecast on project spending or timeline, they want your best current estimate or things are headed. If your department is constantly over budget, leadership will look at the variances that just means the gap between what was budgeted and was forecasted or actually spent. A big variance is a red flag. It means either the plan was unrealistic or the execution went sideways. Understanding the difference also helps you communicate better. Instead of saying we're over budget, when you mean our latest forecast show will come in higher than planned, you can have a much more precise and frankly more useful conversation. So let's recap. The budget, the plan, set it up prove it and leave it. It's your benchmark. The forecast, the reality check, updated often, it's your GPS. Budget's come in various flavors, incremental, zero-based, activity-based, and flexible. Each one reflecting a different philosophy about how a company thinks about money. One looks backward to hold you accountable. The other looks forward to help you navigate, and now you know enough about both to hold you your own and a financial conversation. And the next time in a meeting someone throws out these words, you know exactly what they mean, and you might be even impressed a few people in the process. I'd love to hear from you what clicked, what didn't, and what you want me to cover next. Reach me at HavenJ at cf.edu. That's it for today. Thanks for listening, and remember, just because the numbers you're confusing doesn't mean you have to be. Until next time. In Gil Markovik.