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Budgeting, Forecasting and Variance Analysis

Budgeting is an outline of expectations for what a company wants to achieve for a particular period, usually one year. Characteristics of budgeting include:

  • Estimates of revenues and expenses
  • Expected cash flows
  • Expected debt reduction
  • A budget is compared to actual results to calculate the variances between the two figures.

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Analysis

Forecasting is an estimates a company’s future financial outcomes by examining historical data. Financial forecasting allows management teams to anticipate results based on previous financial data. Characteristics of financial forecasting include:

  • Used to determine how companies should allocate their budgets for a future period. Unlike budgeting, financial forecasting does not analyze the variance between financial forecasts and actual performance.
  • Regularly updated, perhaps monthly or quarterly, when there is a change in operations, inventory, and business plan
  • Can be created for both the short-term and long-term.
  • A management team can use financial forecasting and take immediate action based on the forecasted data.

Financial forecasting can help a management team make adjustments to production and inventory levels. Additionally, a long-term forecast might help a company’s management team develop its business plan.

Variance analysis is the study of deviations of actual behaviors versus forecasted or planned behaviors in budgeting or management accounting. This is essentially concerned with how the difference of actual and planned behaviors indicates how business performance is being impacted.

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