Budgets and forecasts are two very valuable tools for every business owner – you need them both. However, they are two very different tools that are often misused.
When you think budget, think "Target." This is where you want to go. Normally you prepare a budget at the beginning of the year and adjust periodically – at most maybe once per quarter. It represents your intentions. You build a budget based on your expectations and your understanding of your historical costs and sales.
A forecast looks the same as the budget and the method of putting a forecast together is the same as a budget, however the forecast is your latest expectation of what you believe will happen over the next few months based on what is happening in your business NOW. A forecast is most useful if revisited at least monthly based on your latest information. Used wisely, a forecast is a tool that will ensure that you never run out of cash. It is not meant to be a goal.
Your budget is the course you have chosen to get to your desired destination. It is the course the captain plots when he or she sets sail. A forecast, on the other hand, is like the ship's radar. Instead of telling the captain where the captain would like to go, the radar tells the captain where he or she is actually going based on the present course.
Using this analogy further, a planned course might say 'sail to the Bahamas' with a very clear plot line. The radar might say 'there is a massive cargo ship that you are going to run into if you stay on this course' which requires the captain to make a change in the planned course.
In business, you may have a budget that calls for your to have $500,000 in cash at the end of the year in the bank. However, based on your most recent history and your expectations based on current circumstances, your forecast might tell you that you'll actually have no cash at the end of the year based on present information. You need to be aware of this so that you can take corrective action.
Running your business without a budget is like driving your car and having no idea where you are going. Running your business without a forecast is like driving with not only no destination but also with your eyes closed. You have no idea what is in front of you or any idea where you are going.