For a business to grow and survive in today’s dynamic environment where profit margins are squeezed and companies are forced to operate with lower cost, budgeting and forecasting are important financial disciplines for business success.

Not only does the challenge lie in drafting the budget, the challenge lies in operating within the constraints of the budget and to generate income which achieves a revenue forecast.

While many people use the terms budget & forecast to mean the same thing, these definitions may help:

Budget – a detailed projection of expenses for a fixed period (often 12 months) set before the start of the period. Budgets are based on a range of assumptions about external market conditions and internal performance. A reasonable budget allows you to use your resources where they're most needed, so your business will head in the right direction. Creating a financial plan  lets you control your business's cash flow instead of it controlling you.

Forecast – a conservative estimate of how much sales revenue you'll have next year. Look at what you made last year, and extrapolate and forecast from that.

In effect, budgets and forecasts are the detailed financial extensions to the business plan . They set out the financial expectations of the business. They also guide decision-making and where the business will invest its resources (inventory, staff, plant and equipment) and predicts business results.

Budgeting & forecasting tips:

• make sure your budget and forecast makes sense.
• revenues need to match expenses in terms of timing.
• a good budget or forecast needs to be systematic so work on one type of expense or revenue at a time.
• document assumptions and special entries thoroughly.
• Regularly compare the budget or forecast to actual data. See variance analysis.