Budgeting (or profit planning) is a process or technique with broad applications in the management of a business, school or government agency. The rules apply to not-for-profits, as well. The process involves the formation of definite and specific plans or budgets for a limited future period, usually the ensuing fiscal or calendar year. These plans, which take into account all phases of the budgeted operations, are given expression in financial terms. They also become standards against which to measure and evaluate actual performance as the period progresses. Budgeting is, therefore, not only a short term planning and coordinating process, but is also a means of exerting management control over budgeted operations. Budgeting becomes a management process rather than a financial one.

Budgeting, as Distinguished from Forecasting

Forecasting and budgeting, despite their similarities, should be clearly distinguished from each other. A forecast is a prediction of likely future events. But, unlike a budget, a forecast is not a plan for achieving those forecasted (desired?) results. And a forecast is too general to serve as a control standard against which actual progress across the period can be measured. Forecasts are the starting point in the budget planning process. Most firms and public agencies precede the preparation of their operating budgets with revenue forecasts and expectations of economic conditions within their markets or constituencies, and in the world's economy as a whole. We've just witnessed how economic conditions in Greece and Italy have affected the United States, as well as the poor financial climate since 2008.

Essentially, the forecasting process analyzes the market and other conditions that the company or the agency is likely to face during the forthcoming period and attempts to predict what sales level the company can expect to achieve under those economic and market conditions. Budgeting, on the other hand, is an attempt by management to respond to those predicted conditions; to allocate the organization's resources in such a way so as to take the best advantage of the anticipated situation and fulfill the sales or revenue forecast.

The distinction between budgeting and forecasting is not simply a matter of degree: forecasting requires its own techniques and is a management skill in of itself. In addition, a firm or agency that does not keep the distinction in mind, might undertake a program of budgeting that includes little more than forecasts; such a program would lack the depth, the detail and the involvement, at all levels of management, that are considered necessary inputs to a successful budgeting system.

Long-Range Planning, as Distinguished from Budgeting

Budgeting is also distinguished from long-range planning. Unlike a long-range plan, a budget is specific and detailed, and it is usually prepared for no longer than one year ahead. Retail organizations very often budget on a six months' basis. These characteristics are practical requirements for an effective operating plan, which a budget is intended to be. By contrast, the kind of planning that looks more than one year into the future is necessarily more general and less detailed than the budget. The budget, in every sense of the word, ought to be Year One of the long-range plan. These differences are also addressed in the section, below, comparing strategic planning to tactical planning.

BUDGETING'S ROLE IN THE MANAGEMENT PROCESS

The purpose of budgeting is to assist management in accomplishing the basic tasks of planning, coordinating and controlling the activities of the entity. It is not the only tool that management can use in this regard, but it can be the one that is the most effective. Moreover, it serves to correlate these tasks: in fact, some executives emphasize that a budgeting system will lack effectiveness unless the system encompasses them.