Financial forecasting versus modelling and budgeting – what comes first?

Financial forecasting, modelling and budgeting are all key to a finance team. Forecasting estimates important financial metrics such as sales, income, and future revenue to support budgeting and financial planning. In essence, they are financial projections which are performed to determine future business performance and are used to provide clarity and certainty to executives, investors, and shareholders about future performance expectations.

1. Budgeting is the company’s financial expectations for the future, including cash flows. It’s typically only updated periodically throughout the year. The budget to actual performance comparison can trigger remedial steps to bring actual results back into line with the budget.
2. Financial forecasting entails estimating and predicting the company’s future performance, which is updated regularly. Forecasts are typically used for operational decision-making.
3. Financial modelling entails simulating how financial forecasts and other data may affect the company’s future if everything goes according to plan. Financial modelling is done for very specific and often discrete purposes.

The financial forecasting process includes the analysis of past business performance, current business trends, and other relevant factors. However, some aspects of financial forecasting may change depending on the type and purpose of the forecast.

So, what comes first, the budget or the forecast? Typically, the budget is created first. It reveals the direction of the organisation’s finances, while the forecast tracks whether or not the company is meeting its financial goals as outlined in the budget. But realistically, the two work in tandem with each other. For example, the forecast could be used to create and update the budget.

The financial value of a business is determined by its ability to set stretching and achievable financial performance targets, and its success in reaching those targets. Effective financial forecasting maintains an objective evidence-based link between an organisation’s strategy and tactics.

By combining financial analysis and best practices with a technology platform, every leader is able to contribute, take ownership, and feel accountable for delivering on their portion of the forecast. Perhaps, most important of all, they should be used to continually challenge assumptions and their impact on the future periods of the forecast.

For further information, including the differing transformation options, download our financial forecasting guide.