difference between business plan and a budget

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Budget vs. Forecast: Key Differences You Need to Know

difference between business plan and a budget

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For businesses, it’s critical to have an accurate budget and an accurate forecast. This is especially true of small businesses where a single accounting oversight can leave a business owner strapped for cash or, worse, having to let an employee go.

Are you scratching your head right now? If you have always thought of your business budget and your business forecast as one and the same, you’re not alone. Forecasts and budgets are two different, yet equally important, financial animals. Here's what you need to know.

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What's the difference between a budget vs. a forecast?

The difference between a budget and a forecast is that a business's budget is a plan that its management sets to determine how they want to grow the company. A budget doesn't predict what will happen but sets a plan for what the business owner wants to happen. A forecast, on the other hand, estimates the future financial progress and outcomes of the business. Management teams use historical data and growth rates to forecast what the business's financials will look like in the future.

Business budgets 101

A budget sums up a business's goals for the upcoming year. Think of it as a plan of action over a certain amount of time. In a budget, costs and revenue are input into a spreadsheet.

When it comes to creating a budget, remember that a budget should:

Consider the expected demand for products and services.

Take a company’s highest priorities and arrange the appropriate resources to cover those priorities.

Show potential problems early enough that a company can take action.

Have a baseline to show against the actual results.

Different types of budgets include:

Sales budget.

Production budget.

Marketing budget.

Project budget.

Why should you create a budget?

A budget is a key management tool for small business owners. When you think of budgets vs. forecasts, think of a budget as a plan: It helps you map out where you want to be in the next one, two, or five years.

You set your business budget with the help of your forecast (after all, you don't want to budget for financial growth that won't really happen based on historical performance), execute on your plan and compare your actual progress against what you planned for in your business budget.

Setting and sticking to a budget is a great way to make sure that your team is always investing in the things you've decided will make you successful and make real progress to that goal.

Forecasts 101

Forecasts are more abstract in the sense that they are working from historical data to project or predict what might happen in the future. They also look at current and future possibilities as a way of safeguarding a business.

Like we mentioned above, a budget uses these predictions in order to fiscally prepare should they happen. Following a budget is an obligation for a small business, while they are not obligated to follow a forecast. People divide forecasting into two different types:

Judgment forecasting —Judgment forecasting utilizes only your intuition and experience to surmise what might happen in the near future. It is best used when there is no historical data to work from like for new product launches.

Quantitative forecasting —This type of forecasting uses large amounts of data to derive the most likely situations that a small business might face. It relies on repeated patterns in order to come to its conclusions.

Using both judgment forecasting and quantitative forecasting allows a small business to get the most accurate take on what the fiscal year might bring.

We also recommended that you use at least two, ideally three forecasts. These different forecasts should account for the best possible growth, the worst possible growth and "okay" growth. Looking at this can help you understand just how fast you're growing.

Why should you use a forecast?

As we mentioned above, you don't want to waste time budgeting for financial and business growth that will never really happen. A forecast helps you ground your predictions in reality by taking past financial growth and projecting that growth in the future.

A forecast also helps you react to change in a way that a budget does not. For instance, if your business typically has a slow month, a forecast will show you that in the numbers. Or, if you have forecasted your growth based on retaining a large client and that client for some reason is no longer using your services, you can quickly adjust your forecast to compensate for the loss.

This article originally appeared on Fundera, a subsidiary of NerdWallet.

Jennifer Dunn also contributed to this article.

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Budgeting and business planning

Once your business is operational, it's essential to plan and tightly manage its financial performance. Creating a budgeting process is the most effective way to keep your business - and its finances - on track.

This guide outlines the advantages of business planning and budgeting and explains how to go about it. It suggests action points to help you manage your business' financial position more effectively and ensure your plans are practical.

Planning for business success

The benefits, what to include in your annual plan, a typical business planning cycle, budgets and business planning, benefits of a business budget, creating a budget, key steps in drawing up a budget, what your budget should cover, what your budget will need to include, use your budget to measure performance, review your budget regularly.

When you're running a business, it's easy to get bogged down in day-to-day problems and forget the bigger picture. However, successful businesses invest time to create and manage budgets, prepare and review business plans and regularly monitor finance and performance.

Structured planning can make all the difference to the growth of your business. It will enable you to concentrate resources on improving profits, reducing costs and increasing returns on investment.

In fact, even without a formal process, many businesses carry out the majority of the activities associated with business planning, such as thinking about growth areas, competitors, cashflow and profit.

Converting this into a cohesive process to manage your business' development doesn't have to be difficult or time-consuming. The most important thing is that plans are made, they are dynamic and are communicated to everyone involved. See the page in this guide on what to include in your annual plan.

The key benefit of business planning is that it allows you to create a focus for the direction of your business and provides targets that will help your business grow. It will also give you the opportunity to stand back and review your performance and the factors affecting your business. Business planning can give you:

a greater ability to make continuous improvements and anticipate problems
sound financial information on which to base decisions
improved clarity and focus
a greater confidence in your decision-making

The main aim of your annual business plan is to set out the strategy and action plan for your business. This should include a clear financial picture of where you stand - and expect to stand - over the coming year. Your annual business plan should include:

an outline of changes that you want to make to your business
potential changes to your market, customers and competition
your objectives and goals for the year
your key performance indicators
any issues or problems
any operational changes
information about your management and people
your financial performance and forecasts
details of investment in the business

Business planning is most effective when it's an ongoing process. This allows you to act quickly where necessary, rather than simply reacting to events after they've happened.

Review your current performance against last year/current year targets.
Work out your opportunities and threats.
Analyse your successes and failures during the previous year.
Look at your key objectives for the coming year and change or re-establish your longer-term planning.
Identify and refine the resource implications of your review and build a budget.
Define the new financial year's profit-and-loss and balance-sheet targets.
Conclude the plan.
Review it regularly - for example, on a monthly basis - by monitoring performance, reviewing progress and achieving objectives.
Go back to 1.

New small business owners may run their businesses in a relaxed way and may not see the need to budget. However, if you are planning for your business' future, you will need to fund your plans. Budgeting is the most effective way to control your cashflow, allowing you to invest in new opportunities at the appropriate time.

If your business is growing, you may not always be able to be hands-on with every part of it. You may have to split your budget up between different areas such as sales, production, marketing etc. You'll find that money starts to move in many different directions through your organisation - budgets are a vital tool in ensuring that you stay in control of expenditure.

A budget is a plan to:

control your finances
ensure you can continue to fund your current commitments
enable you to make confident financial decisions and meet your objectives
ensure you have enough money for your future projects

It outlines what you will spend your money on and how that spending will be financed. However, it is not a forecast. A forecast is a prediction of the future whereas a budget is a planned outcome of the future - defined by your plan that your business wants to achieve.

There are a number of benefits of drawing up a business budget, including being better able to:

manage your money effectively
allocate appropriate resources to projects
monitor performance
meet your objectives
improve decision-making
identify problems before they occur - such as the need to raise finance or cash flow difficulties
plan for the future
increase staff motivation

Creating, monitoring and managing a budget is key to business success. It should help you allocate resources where they are needed, so that your business remains profitable and successful. It need not be complicated. You simply need to work out what you are likely to earn and spend in the budget period.

Begin by asking these questions:

What are the projected sales for the budget period? Be realistic - if you overestimate, it will cause you problems in the future.
What are the direct costs of sales – i.e. costs of materials, components or subcontractors to make the product or supply the service?
What are the fixed costs or overheads?

You should break down the fixed costs and overheads by type, e.g.:

cost of premises, including rent, municipal taxes and service charges
staff costs –e.g. wages, benefits, Québec Parental Insurance Plan (QPIP) premiums, contributions to the Québec Pension Plan (QPP) and to the financing of the Commission des normes du travail (CNT)
utilities – e.g. heating, lighting, telephone
printing, postage and stationery
vehicle expenses
equipment costs
advertising and promotion
travel and subsistence expenses
legal and professional costs, including insurance

Your business may have different types of expenses, and you may need to divide up the budget by department. Don't forget to add in how much you need to pay yourself, and include an allowance for tax.

Your business plan should help in establishing projected sales, cost of sales, fixed costs and overheads, so it would be worthwhile preparing this first. See the page in this guide on planning for business success.

Once you've got figures for income and expenditure, you can work out how much money you're making. You can look at costs and work out ways to reduce them. You can see if you are likely to have cash flow problems, giving yourself time to do something about them.

When you've made a budget, you should stick to it as far as possible, but review and revise it as needed. Successful businesses often have a rolling budget, so that they are continually budgeting, e.g. for a year in advance.

There are a number of key steps you should follow to make sure your budgets and plans are as realistic and useful as possible.

Make time for budgeting

If you invest some time in creating a comprehensive and realistic budget, it will be easier to manage and ultimately more effective.

Use last year's figures - but only as a guide

Collect historical information on sales and costs if they are available - these could give you a good indication of likely sales and costs. But it's also essential to consider what your sales plans are, how your sales resources will be used and any changes in the competitive environment.

Create realistic budgets

Use historical information, your business plan and any changes in operations or priorities to budget for overheads and other fixed costs.

It's useful to work out the relationship between variable costs and sales and then use your sales forecast to project variable costs. For example, if your unit costs reduce by 10 per cent for each additional 20 per cent of sales, how much will your unit costs decrease if you have a 33 per cent rise in sales?

Make sure your budgets contain enough information for you to easily monitor the key drivers of your business such as sales, costs and working capital. Accounting software can help you manage your accounts.

Involve the right people

It's best to ask staff with financial responsibilities to provide you with estimates of figures for your budget - for example, sales targets, production costs or specific project control. If you balance their estimates against your own, you will achieve a more realistic budget. This involvement will also give them greater commitment to meeting the budget.

Decide how many budgets you really need. Many small businesses have one overall operating budget which sets out how much money is needed to run the business over the coming period - usually a year. As your business grows, your total operating budget is likely to be made up of several individual budgets such as your marketing or sales budgets.

Projected cash flow -your cash budget projects your future cash position on a month-by-month basis. Budgeting in this way is vital for small businesses as it can pinpoint any difficulties you might be having. It should be reviewed at least monthly.

Costs - typically, your business will have three kinds of costs:

fixed costs - items such as rent, salaries and financing costs
variable costs - including raw materials and overtime
one-off capital costs - purchases of computer equipment or premises, for example

To forecast your costs, it can help to look at last year's records and contact your suppliers for quotes.

Revenues - sales or revenue forecasts are typically based on a combination of your sales history and how effective you expect your future efforts to be.

Using your sales and expenditure forecasts, you can prepare projected profits for the next 12 months. This will enable you to analyse your margins and other key ratios such as your return on investment.

If you base your budget on your business plan, you will be creating a financial action plan. This can serve several useful functions, particularly if you review your budgets regularly as part of your annual planning cycle.

Your budget can serve as:

an indicator of the costs and revenues linked to each of your activities
a way of providing information and supporting management decisions throughout the year
a means of monitoring and controlling your business, particularly if you analyse the differences between your actual and budgeted income

Benchmarking performance

Comparing your budget year on year can be an excellent way of benchmarking your business' performance - you can compare your projected figures, for example, with previous years to measure your performance.

You can also compare your figures for projected margins and growth with those of other companies in the same sector, or across different parts of your business.

Key performance indicators

To boost your business' performance you need to understand and monitor the key "drivers" of your business - a driver is something that has a major impact on your business. There are many factors affecting every business' performance, so it is vital to focus on a handful of these and monitor them carefully.

The three key drivers for most businesses are:

working capital

Any trends towards cash flow problems or falling profitability will show up in these figures when measured against your budgets and forecasts. They can help you spot problems early on if they are calculated on a consistent basis.

To use your budgets effectively, you will need to review and revise them frequently. This is particularly true if your business is growing and you are planning to move into new areas.

Using up to date budgets enables you to be flexible and also lets you manage your cash flow and identify what needs to be achieved in the next budgeting period.

Two main areas to consider

Your actual income - each month compare your actual income with your sales budget, by:

analysing the reasons for any shortfall - for example lower sales volumes, flat markets, underperforming products
considering the reasons for a particularly high turnover - for example whether your targets were too low
comparing the timing of your income with your projections and checking that they fit

Analysing these variations will help you to set future budgets more accurately and also allow you to take action where needed.

Your actual expenditure - regularly review your actual expenditure against your budget. This will help you to predict future costs with better reliability. You should:

look at how your fixed costs differed from your budget
check that your variable costs were in line with your budget - normally variable costs adjust in line with your sales volume
analyse any reasons for changes in the relationship between costs and turnover
analyse any differences in the timing of your expenditure, for example by checking suppliers' payment terms

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What’s the difference between a plan, a budget, and a forecast?

Budgeting & forecasting.

Updated: October 15, 2024 |

Taylor Josephs

Solutions Architect 3, Cube Software

Taylor Josephs is an experienced finance expert with deep knowledge of FP&A. She earned her Bachelor's in Business Administration from the University of Wisconsin and currently resides in Minneapolis, Minnesota.

What’s the difference between a plan, a budget, and a forecast?

“Remind me, what’s the difference between the plan and the forecast?” is something we often hear from executives looking for clarity.

While a company’s plan, budget, and financial forecast are often discussed in the boardroom, these terms’ functions are not always clear.

Finance leaders commonly use the three terms in conjunction with one another, allowing each model to inform the others.

So...are they interchangeable? No.

Financial forecasting , budgeting, and planning each serve a unique purpose. A plan serves as the foundation, a budget guides how to allocate cash, and a forecast projects the financial future of the business.

CFOs understand that each is a standalone piece of the company’s financial puzzle. Let's take a close look at each piece.

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Financial planning: explained

Generally, a financial “plan” aims to define the financial direction and vision of the organization within the context of a broader business plan.

Leaders ask themselves how the business will stack up in the next 1, 5, or even 10 years. The “plan” answers that question by outlining the company’s operational and financial objectives. Executives build out teams and infrastructure based on this plan and the defined goals.

Colloquially, the “plan” is sometimes used interchangeably with the most recent budget or forecast, and can be broadly considered the budget or forecast that is the most likely “version of truth”.

Because of the long-term nature of a financial plan, it allows for more flexibility and creativity. In the case of a financial plan (versus a budget, for example), the means are less important than the end. Ultimately, a good financial plan provides a top-down operational framework to explore various scenarios.

Because an organization's future is undefined, financial planning is a perpetual process. Despite this, a plan is more static—more of a roadmap than a document updated daily. The plan relies on historical performance data and subjective financial analysis, so it can never be fully accurate.

Budgeting: explained

Businesses, but most commonly, the Finance team, compile a budget to determine how the company will spend its capital during the next period—a month or quarter, but typically a fiscal year.

The budget’s primary goal is determining what resources to allocate to each part of the company, from salaries to office supplies. The focus of a budget revolves around cash position, including expected revenues and expenses, to create specific financial goals for the foreseeable future.

Most businesses create a budget annually and implement it from the start of the fiscal year. The budget is also commonly considered “unmovable” and is used to gauge performance of actuals or forecast data versus the planned budget.

A thorough budget offers clear guidance on how a company should be spending its resources by providing a line item for any expense imaginable. Budgets also create accountability for departmental spending because overages are apparent and gaps in appropriate funding become clear as the year unrolls.

Teams should review the budget regularly and compare it with actuals, making each department responsible for any variances that occur.

A budget aligns expectations with reality when it comes to revenue and expenses.

Budgeting can be a difficult process because of the kind of involvement it takes across departments, including meetings and negotiations with department leaders to determine the amount of cash they will need to accomplish business goals over the budget. Since budgets are generally made to last an entire year, a budget might constrain necessary spending (or saving) if any unexpected situations in cash flow arise.

Essentially, expense allowances are built not to exceed budget limits, while income projections are the minimum needed to balance the budget. Financial analysts need to calculate the variances between the two figures to evaluate the budget's efficacy and the organization's fiscal health.

Forecasting: explained

A forecast is a financial snapshot of the future as it is best understood today. When creating a forecast , teams must examine possible financial outcomes based on the most up-to-date drivers and assumptions . The result is a view of how the business is trending so that the leaders can determine whether or not adjustments should be made to the existing budgets or plans.

For example, the budget might assume that the business will hit a $10M revenue target, but the forecast shows that the business is on target to only achieve $8M. Given the difference between the forecast and the budget, the business might adjust the variable costs associated with lower revenue, while simultaneously adjusting the expense plan in order to hit cash targets.

A company’s financial forecast is updated regularly, such as monthly or quarterly. The forecast’s undefined nature allows it to be used for both short- and long-term projections and adapt to recent performance data. In this way, executives can make changes in real-time, adjusting their operations, such as production, marketing approach, and staffing.

Forecasting can be a time-consuming process that not all businesses are able to stay on top of regularly. Because of this, many businesses update their forecast data periodically, such as quarterly or biannually. It’s considered a best practice to build a rolling (ongoing) forecast to make these adjustments in real-time.

Conclusion: Plan vs. budget vs. forecast

All three terms reflect expectations and estimates of financial objectives. Financial planning lays the foundation for budgeting, suggesting that a financial plan must precede the budget so that company leaders have an idea of what they are budgeting for. Meanwhile, a forecast projects how far over or under expectations a company may be.

A financial plan is a strategic, long-term tool, while a budget is tactical and short-term. A financial forecast is an updated reflection of the future. In a way, the forecast bridges the gap between the business plan and the budget.

The most financially disciplined businesses leverage all three tools in planning and operations. Financial modeling software like Cube can help companies build multiple plan scenario types, including budgets, forecasts, and even what-ifs, in a way that allows leaders to visualize data, analyze past performance, and calculate how decisions may affect future goals.

Want to see how Cube can accelerate your financial planning? Get a demo today.