Fin 370 Week 1

• Define the difference between forecasting and budgeting. What is the difference between an operating budget and a cash budget?

Both forecasting and budgeting are estimates for future. Estimates that are not necessarily achievable are called forecasting but achievable estimates are called budgeting. Budgeting may be defined as planning for forthcoming period activity in quantitative and financial terms. For example, if you want to make sales budget then it is important to know that what quantity to be sold at what price. Suppose you have to sell 50,000 units of product A @ $10 each, it means that in quantitative terms it is 50,000 units and financial terms it is $500,000.

Forecasting is the first step which helps in making budget, if estimates have been forecasted are achievable then it is converted into budget. For example, if marketing department forecasts that it can sell 50,000 units and company believes that all resources are available to meet the target then the budget will be made for 50,000 units. But it some of the resources are in scarcity, say production capacity is limited to 40,000 units then company has to make budget for the achievable target.

It is important to keep in mind the difference between forecasting and budgeting. If the difference is not kept in mind then efforts to use budget as planning tool may be in vain and there are chances of conflict between two departments. As in our example the marketing department would be planning for 50.000 units and production department would be planning for 40,000 units. Therefore it is necessary to make sure what is achievable to bring synchronization among all departments of the organization.

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