What is budgeting and forecasting? Key differences, benefits, and how to get started

At the start of the year, the business looks solid on paper. Steady revenue, realistic goals, and no signs that anything is off. By the time you realize that “figure it out as we go” isn’t a financial strategy, you’re usually scrambling to explain missed targets and anemic account balances. But no budget and no forecasting means no idea where the money went. 

Budgeting and forecasting help companies avoid this kind of chaos. This article breaks down what they are, how they differ, and why both matter. We’ll cover the benefits of using them together, how to do budget forecasting, see real examples in action, and get clear steps to start building a budgeting process that works for your business.  

What is budgeting?

Budgeting is the process of creating a financial plan that outlines how your business plans to make and spend money over a given period, usually the coming fiscal year. A typical business budget covers projected revenue and income, fixed and variable expenses, and profit expectations. It can also take into account future initiatives like planned investments, hiring, and other strategic priorities.

Budgets are the backbone of your business’s financial planning. Without one, it’s hard to prioritize how to allocate resources, invest your money, evaluate results, or recognize when you’re moving in the wrong direction. Once approved, a budget becomes the baseline for measuring actual results and a roadmap guiding informed decision-making across your organization.

Example: Avery, the CFO of a logistics company, works with the department heads each fall to build the annual budget. They project revenue based on expected shipping volume and set expense limits for fuel, labor, and equipment maintenance. When fuel prices spike in Q2, Avery compares actual figures against the plan, flags the overage, and coordinates with operations to adjust delivery schedules to keep costs within range without disrupting service.

What is forecasting?

Forecasting is a structured way to anticipate your business’s future financial performance based on past results, current market conditions, and trends. In finance, this typically involves projecting likely revenue, expenses, and cash flow for a given quarter using a combination of historical data and forward-looking assumptions.

Depending on your goals and timeline, you’ll need to choose the right type of financial forecasting. Short-term forecasts, for example, help you manage cash flow and operating decisions. A long-term forecast, on the other hand, supports big-picture strategic planning. The method you use can also vary based on the kind of analysis you need your forecast to support. Quantitative forecasting relies on data models and historical patterns, while qualitative forecasting pulls from expert judgment, market knowledge, or leadership insight when data is limited. 

Example: Taylor, a finance manager for a growing SaaS company, uses three years of sales and churn data to build a six-month forecast. They notice a seasonal dip in Q3 and use that information to factor in a planned pricing change for Q4. The forecast helps Taylor convince the executive team that the company needs to pause hiring and delay some marketing spend until revenue stabilizes.

What is budget forecasting?

Budget forecasting is how you predict future financial performance based on your business’s planned budget and current trends. It combines budgeting, which sets fixed targets for resources like revenue and expenses, with forecasting, which updates those targets based on historical data and recent performance. 

Most organizations rely on budget forecasting to monitor cash flow, test different scenarios, and guide decisions over the year. When it’s done well, it helps your business stay agile, manage risk, and align your spending with evolving markets and financial goals. 

Example: Jordan, the head of finance for a mid-size retail company, starts the year with a budget of $1.2 million allocated across multiple departments. By the end of Q2, Jordan’s quarterly forecasting shows operating expenses running higher than budgeted due to increased shipping costs. Instead of adjusting the entire budget, Jordan reallocates money earmarked for an equipment upgrade to cover the gap.

Budgeting vs forecasting: What’s the difference?

Knowing how to do budgeting and forecasting starts with understanding where they overlap and where they diverge. Budgeting sets your financial plan; forecasting keeps that plan aligned with your needs and goals when real-world conditions shift. Understanding how the processes differ ensures that you’re using them effectively as individual tools as well as together. 

Benefits of budgeting and forecasting

Strong budgeting and forecasting help you run your business with intention, instead of reacting to what’s in front of you. They force you to weigh the costs and benefits of specific goals, and push you to connect daily decisions to long-term outcomes, like choosing between a retention-boosting holiday bonus or a software upgrade that increases efficiency. Integrating both into your financial planning early on helps keep your business stable and focused, even in a rough quarter or a down year.   

Better financial control

A clear budget forecast helps teams understand spending limits and creates accountability. By setting boundaries for expenses, mapping expected revenue, and creating guardrails for spending, you prevent small problems from becoming big ones—the kind that impact your cash flow. 

Informed decision-making

Modeling different financial scenarios with historical data helps your finance team evaluate the pros and cons of different business plans with more confidence. Having the ability to predict future outcomes can also help your leadership team allocate funds more effectively and stay aligned with broader financial goals.

More accurate cash flow management

Accuracy in forecasting supports better timing for payments, collections, and investments. When teams can estimate incoming and outgoing cash flow, they’re less likely to face shortfalls or bypass opportunities for growth.

Ability to adapt to market changes

A good budgeting and forecasting process helps your team pivot quickly when conditions change unexpectedly. If your assumptions go out the window, you have the option to revise projections, test new models, and reallocate resources to best protect your performance.

Easier stakeholder communication 

Clear financial planning and regular updates make it easier to keep your leadership team, investors, and department heads on the same page about where you’re headed with the business and what you need to get there.

Support investor confidence

Consistent budgeting and forecasting show that the business is tracking performance closely and making decisions based on data rather than guesswork. It’s a strong sign of maturity. And when investors see reliable projections backed by real financial data, they’re more likely to trust your leadership, planning, and vision.

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How to create a budget and forecast

A good budget starts with questions. What are you aiming for? What might change in the market? Developing a reliable budgeting and forecasting system means turning these open-ended discussions into a concrete, repeatable process. Here’s how:

Step 1. Define your goals and assumptions

Start by clarifying what you want the business to achieve and the financial basis for your plans. This could include growth targets, hiring plans, pricing changes, or market shifts. What you assume influences every step that follows, so it’s worth taking extra time here to check your thinking. 

If this is your first attempt and you’re working up to how to forecast a budget, consider using a business budget template. Having the structure laid out in advance can help point you to the right questions and documents until you have a better understanding of what your business needs.

Step 2. Collect historical financial data

Planning forward actually requires a lot of looking back. You’ll need to pull at least a year’s worth of expense, cash flow, and revenue data to establish useful benchmarks and spot patterns.

Step 3. Estimate revenues and expenses

This is where your budget forecast starts to take shape. You’ll use the historical data from Step 2 to estimate what’s likely to happen in the future based on past trends. Remember to adjust for what you know about market conditions.

Step 4. Choose a budgeting method (e.g., zero-based, incremental)

Whether you use zero-based budgeting, incremental planning, or a hybrid approach, the structure you choose needs to match how your business runs. A fast-moving team might benefit from a zero-base reset every accounting cycle, while a more stable or established business is likely fine with incremental updates. What matters is using a method that fits your planning cadence and resource availability. 

Step 5. Build a forecast using real-time and predictive data

Once you’ve got a budget in place, it’s time to build a forecast that makes it dynamic. This is where you pull together current financial results, operational inputs, and external trends to revise and refine your outlook over time. By anticipating shortfalls or surpluses early, you adapt ahead of time instead of reacting after the fact. If your data lives in multiple systems, consider investing in a finance automation solution that offers data syncing, trend detection, or real-time variance alerts to maximize your insights.

Step 6. Incorporate variance analysis

Variance analysis involves comparing your budgeted numbers to results and digging into the “why” behind any gaps. It shows you where you’ve gone off track and can help you decide whether to adjust the forecast, the budget, or your underlying business strategy.

Step 7. Update regularly to reflect changes

Market conditions evolve over time, and even the best business plan has a shelf life. Updating your forecast as the quarter progresses based on new sales data, expense trends, or shifts in strategy ensures that your budget functions as a responsive tool that helps you manage change.  

Step 8. Communicate results with stakeholders

Once you’ve got a budget and a forecast in place, you need to communicate them in a way that people can act on. Managers need visibility into spending limits. Executives want to understand trade-offs, and board members expect to see clear links between expenses and financial goals. 

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5 budgeting and forecasting best practices

Budgeting and forecasting are most effective when you treat them like living processes, not just Excel spreadsheets you look at once a year. The best practices below can help your finance team stay responsive, aligned, and prepared.

1. Use cloud-based planning tools

A static spreadsheet may not cut it when plans change suddenly mid-quarter. Cloud-based business budgeting software allows you to update financial data, adjust projections, and share insights in real time. If you work across locations or need to budget for multiple functions, you’ll likely find that level of flexibility invaluable.

2. Align with strategic goals

A budget is as much about priorities as it is about math. Good forecasting ties your spending and investment to broader financial goals, which means every dollar has a clear purpose and long-term impact.

3. Collaborate across departments

Marketing, sales, and operations all make choices that directly affect the big numbers in your budget. Looping in your department leads early helps surface assumptions, build buy-in across teams, and put a check on unrealistic estimates. 

4. Monitor and adjust regularly

An effective budget is an evolving budget. Use regular variance analysis to compare actual business and market signals against what you planned, then adjust the forecast based on new data. That way, decisions reflect what’s really going on, not what you thought might happen months ago.

5. Track KPIs and performance metrics

Without benchmarks to judge performance, it’s hard to know whether you’re ahead, behind, or right on track. Align your KPIs to each forecasted area, whether that’s cash flow, revenue, or expenses, so your team can spot issues early on and course correct if needed.

Budgeting and forecasting example

Budgeting is how you set your plan; forecasting is what keeps it tied to your financial reality. The two processes work together by setting targets and then adjusting based on how the business actually performs. 

You might set a yearly marketing budget of $480,000 in January, for example, and allocate $120,000 per quarter. But as the year progresses, forecasting based on actual revenue and expense data could indicate that you need to revise your expectations. If sales are soft in Q1,  the forecast would likely lower projected marketing spend in Q2 to protect your cash flow. But if performance rebounds in Q4, you could end up reallocating funds again to support a final push while staying in budget. 

Here’s how budgeting and forecasting looks in practice:

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Budgeting and forecasting are only as useful as the data feeding them. Expense tracking gives finance teams real-time visibility over different employees’ purchasing patterns. And when employee spend is consolidated among the rest of your company’s finances, businesses have an easier time setting budgets and forecasting a company’s future needs. 

Rippling’s spend management software consolidates all of your company’s finances—from payroll and benefits to corporate cards and expense management–giving you an up-to-date view of cash flow across your company and offering unprecedented control over spending patterns.  

While most expense management solutions only allow for basic employee-manager approval chains, Rippling’s expense management software runs on an advanced policy engine that allows you to set hyper-custom policies based on the vendor, dollar amount, and expense category, helping you block out-of-policy expenses with ease. You can also tee up automated workflows that help you control spend, like triggering an alert when a department’s expenses sharply increase. 

With Rippling, you can: 

• Automatically route expenses and bills to the right approver every time 

• Flag out-of-policy spending with hyper-custom policies, like by vendor or value, for further review.

• Close the books faster with AI-powered transaction categorization, and integration with your accounting systems

Budgeting and forecasting FAQs

What comes first, forecasting or budgeting?

Forecasting typically comes first and lays the groundwork for budgeting. A forecast uses your business’s historical data to estimate its future revenue, spending, and cash flow. With those projections in place, you can build a budget that turns them into concrete financial targets and limits.

What are the 5 budgeting steps?

The five budgeting steps are: gather data, set goals, build your budget, get approval, and monitor performance. Together, they help your finance team develop forward-looking projections, connect financial goals to specific expense and revenue targets, and create a clear baseline for variance analysis based on your business’s past performance.

Is budgeting and forecasting part of FP&A?

Yes, budgeting and forecasting are critical to FP&A (financial planning and analysis). The budgeting process sets your revenue and expense targets, while forecasting leverages historical data to tweak projections as conditions evolve. Both processes help your finance team with future financial planning and are essential if you want numbers-driven decision-making to drive your business. Some business budgeting and forecasting tools integrate directly with FP&A platforms for more powerful results.