What is Budgeting and Forecasting?

Case breakdown: Movie Ghar Ghar kee Kahani

This scene that you saw shows how 3 kids (Ravi, Roopa, and Raja) of a family are budgeting the expenses of the house. Their father (played by Balraj Sahni) who is an honest government employee decides to let his children run the household for 6 months. His salary is Rs. 700 (He gets Rs. 630 in hand per month), he decides to give this to his 3 children and asks them to run the household, after the monthly expenses are settled, the children can keep the leftover money.

In the first month, children were in the break-even stage i.e. they were in a no-profit or loss situation. After all the expenses were paid, they were left with Rs. 7.

In the second month, they are at loss, as they aren’t able to pay all expenses and are Rs. 50 short.

Ravi, Roopa, and Raja start forecasting when they decide to let go of the maid from their house so that they can save money in the house.

What is Budgeting?

Similar to what we saw in the scene, managements budgets their financials to quantify their expectation of revenues and expenses for the future. This is done to plan in which the company should direct itself.

Please note how the word expectation has been used in the above sentence. Since revenues and expenses can differ every month, an estimation or a percentage is drawn up. It is drawn to understand the financial position and cash flows of the company. Budgets are used to determine variance (difference between what was budgeted and actual) from the actual result. Similar to the scene that we just saw Ravi budgeted for the expenses but was Rs. 50 short.

Budgets are generally prepared for the entire year and are reviewed every month. During unforeseen circumstances, budgets are revised. For example Demonetization in 2016, Covid in 2019, etc. are some of the circumstances when budgets are revised.

What is Forecasting?

Financial forecasting estimates companies’ future earnings on the basis of past trends. Forecasting helps in making changes to inventory and production levels. Forecasting helps in also preparing a business plan. To forecast future revenue, companies look at past trends. Organizations prepare work papers to show budgeted value and forecasted values of income.

This helps in variance and understanding the difference between the two. Companies get a deeper sense of where they need to go and what they can achieve with budgeting and forecasting.

Difference between Forecasting and Budgeting:

Understanding Budgeting & Forecasting with a Video