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Forecasting methods

The difference between 'forecast' and 'budget'

A question I have often been asked is 'What is the difference between forecast and budget?', either the noun or the verb. The first retort is that they could be identical, as some people use the words interchangeably, and are perfectly free to do so.

Definitions

- Forecast:

- to predict or estimate a future event or trend;

- to estimate or calculate in advance, especially to predict by analysis.

These two definitions of forecast focus on prediction.

- Budget:

- an amount of money available for spending that is based on a plan for how it will be spent;

- an itemized summary of estimated or intended expenditures.

The emphasis is on estimates of amounts - possibly more certain than a forecast.

Interestingly, dictionary definitions focus almost entirely on expenditure, whereas the more important operational budget is sales.

It is essential that businesses make it clear as to what the words mean to them. To me, forecasting is a precursor to budgeting - which, from the definition, is more exact.

How you might forecast

What exactly can 'forecast' mean?

Interestingly both definitions above use 'estimate' and 'predict'. But what is an estimate? We all know how rough estimates can be! One definition of 'predict' is as follows:

to declare or indicate in advance; especially: foretell on the basis of observation, experience, or scientific reason.

Most importantly, predictions should have sound bases or rationales. This section aims to identify what may be sound bases, rationales and methods for predictions and forecasts.

Before leaving definitions, we should be wary of further synonyms for forecast, such as prophesies, hazard and forebode. We must avoid the dubious, the gamble and the over-pessimistic (or -optimistic) when we forecast.

We have to accept that the word 'forecast' and its synonyms have many meanings, with users having quite diverse understanding of what a forecast actually is. It is essential to define how you understand 'forecast' and that you and your colleagues share this understanding.

 
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