Budgeting uses estimation to quantify the expectation of revenues a business wants to achieve for a future period, whereas financial forecasting is used to estimate the amount of revenues that will be achieved.

In essence, a budget is a quantified expectation for what a business wants to achieve. Its characteristics are:

  • The budget is a detailed representation of the future results, financial position, and cash flows that management wants the business to achieve during a certain period of time.
  • The budget may only be updated once a year, depending on how frequently senior management wants to revise the information.
  • The budget is compared to actual results to determine variances from expected performance.
  • Management takes remedial steps to bring actual results back into line with the budget.
  • The budget to actual comparison can trigger changes in performance-based compensation paid to employees.
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