If you want to future-proof your business, budgeting and forecasting are essential.

With soaring inflation and the cost of living crisis impacting firms across the UK, many businesses are left uncertain about what the future holds for them. But while no one can predict exactly what’s around the corner, some careful planning can help you steer your business in the right direction.

Used on their own, budgeting and forecasting are useful financial planning tools — but together, they can give you even deeper insights into your business, allowing you to mitigate risk and strengthen your business strategy.

What’s the difference between budgeting and forecasting?

You may hear people use the terms budgeting and forecasting interchangeably — but there are important differences between the two processes.

Put simply, a budget outlines what you want your business to achieve over a certain period of time — typically a year, but sometimes longer. This can help you plan your finances in advance and set realistic goals for the year ahead. Your budget should stay the same throughout this period, even if your circumstances change.

Meanwhile, a financial forecast predicts where your business is actually going. This involves looking at your business’s historical financial data and current circumstances to help determine whether you’re on track to meet your goals.

Forecasts are essential for predicting your short-term growth expectations, so you’ll need to review them regularly. Depending on your needs, your business may benefit from forecasting on a quarterly, monthly, or even weekly basis.

Budgeting and forecasting are most effective when used in tandem. You’ll usually need to draw up a budget first — but your past forecasts can help you create more realistic budgets going forward.