Every business needs to plan its expenditure and calculate ROI. Planning the budget gives guidance to organizations and teams on cost control. Organizations plan a long-term budget, for 1-5 years, which helps them to run the business based on the funding required. These budgets then come down to the individual project and application levels. During solution design and development, the team needs to consider the available budget and plan accordingly. The budget helps to quantify what the business wants to achieve. The forecast provides an estimate of what the company is making.
You can consider budget planning as important strategic planning in the long run, and the forecast provides an estimate at a more tactical level to decide the business direction. In application development and operation, you can quickly lose track of the budget and overrun costs in the absence of a budget and a forecast. These two terms may be confusing, so let's understand the clear difference between a budget and a forecast:
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Budget |
Forecast |
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Represents future result and cash flow for business objectives that you want to achieve |
Represents revenue and current situation of the business |
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Plans for the long term, for example 1-5 years |
Plans month to month or quarterly |
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Is adjusted less frequently, maybe once in a year, based on business drivers |
Is updated more regularly based on actual business progress |
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Helps to decide business directions such as organization restructuring based on actual cost versus budgeted cost |
Helps to adjust short-term operational costs such as additional staffing |
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Helps to determine performance by comparing planned cost versus actual cost |
Isn't used for performance variation but for streamlining progress |
Forecast information helps you to take immediate action, while the budget may become unachievable due to changes in the market. As shown in the following diagram, while you are working on day-to-day solutions, developments based on historic expenditure forecasts can prompt you to adjust the next month's cost:
In the preceding billing and forecast report, your monthly budget is $3,000 and the forecast is showing that, by the end of the month, you will overrun your budget. Here, the forecast helps you act and control cost to stay within budget. Let's look at the mechanism to improve cost-efficiency by managing demand and service in the next section.