Key terms

Budget

Where we want to go

  • Numbers, where lower is better, are budgeted.

  • Numbers, where higher is better, are targeted.

  • A budget is updated infrequently, once or twice a year.

  • There's usually just one budget, though it can cover many aspects of the business in detail.

Forecast

Where we’re actually going

  • A forecast is based on what's happened so far and what we think is likely to happen in the future.

  • A forecast quickly becomes outdated as new events unfold.

  • They must be updated frequently to remain useful. Quarterly, monthly, or even weekly.

  • There can be multiple forecasts to game out different possible futures. These are called scenarios.

Actuals

Where we actually went

  • Numbers from the company's books, recorded via bookkeeping.

  • Actual numbers are compared to the budgeted numbers to see whether things went according to plan or not.

  • When things didn't go according to plan, the actuals and the budget will be significantly different. This is called a variance.