Operational budgeting

Hello, welcome to operational budgeting. I'm Dr. Michael McDonald. Today I'd like to talk to you about this underappreciated aspect of the financial world.

People often talk in business about budgets, and they talk about forecasts. But what's left out of the equation is what the difference between budgets and forecasts actually is from a business perspective. Budgets are generally created on an annual basis and then they're updated quarterly. The budget is an aspirational goal. It tells us from the business' point of view where we want to go. Budgets are generally used for setting goals, for creating incentives for the firm, things like that. Essentially they're where the business hopes to get to over time, and then the management team behind the business uses the budget as a way to bring the entire company together, trying to achieve those goals. Budgets again, are less about managing the operations and more about bringing the whole company together behind an objective over time. So they're not necessarily critical for decision-making as a result. In contrast, forecasts tend to be much more precise than budgets. Forecasts are created annually like budgets, but they're updated on a weekly or perhaps a monthly basis. The forecast tells us not so much where we would like to go, but where we are going to go. So it's less of an aspirational document and more of an actual projection given the real day-to-day realities for the firm. Forecasts are used for managing the day-to-day operations of the company, and generally, they're restricted to the groups that need them. Where we might share a budget across the firm as a whole, you're unlikely to do that with a forecast. Instead, you're going to send the forecast to the groups that need it for their day-to-day decision-making purposes.