In a recent article we discussed the many benefits of budgeting. What then is forecasting and how is it different? Budgeting and forecasting may seem similar because both attempt to predict future financial results. However, differences are significant.
Budgeting sets annual financial goals for the organization. Often, bylaws require that the annual budget be approved by the board, consistent with its fiduciary responsibilities. Budgeting defines the organization’s bullseye and provides a basis for management accountability.
Once budgeted goals are set, forecasting is a real-time, dynamic process of projecting financial statement results. The original budget is the forecast’s starting point and is updated with new information as it becomes available, such as sales trends, inflation outlooks, changing tax rates, employee attrition and competitor reactions. Forecasts can be prepared monthly, quarterly or after a triggering event, such as the results of a nonprofit’s largest annual fundraiser.
Significantly, variances between a budget and a forecast provide important information. Most immediately, an organization can make operational corrections. For example, if a budgeted grant is not received, hiring of employees funded by the grant can be deferred or cancelled. Another learning from variances might be the existence of strategic drift. For example, a nonprofit school that has offered a strong liberal arts curriculum to generations of families might be seeing students increasingly gravitating to schools with a technology specialization. Finally, variances also arise from faulty budget assumptions. Two of the most significant budget assumptions are general inflation levels and rising employee benefit costs, especially health care. A small difference in the assumptions can have an outsized impact when applied to a large expense element.
It is crucial for nonprofits to both identify and explain their budget-to-forecast variances. Not getting this level of detail? Let’s have a conversation.
Jane Repensek, CPA, MBA
Consultant