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successful management requires both effective budgeting and forecasting budgeting and forecasting are not interchangeable each has a distinct purpose a budget details expected future results it is a definitive statement of expected sales volume and operational production capacity as well as revenue and profit streams budgeting is a coordinated effort across the organization to optimize allocation of scarce resources to most efficiently achieve the organization's mission and objectives forecasts are predictions that focus on probable future events upon which budgets are based the sales forecast is the initial and most critical step in forecasting an organization's future performance all other forecasts are dependent on the accuracy of the sales forecast the sales forecast identifies future probabilities or expectations from the marketplace it consists of sales revenue sales volume anticipated cost and profit contributions or margins forecasts utilize historical data statistical analysis expert opinion and other references to improve accuracy and inclusiveness a budget is similar to the flight plan for a plane a detailed map of where the organization attends to be at any given point and what it needs to reach those objectives the actual performance and updates to the forecasts are like the air traffic controller guiding the organization to either stay the course or change direction based on the data budgets and forecasts can be both short term or less than one year as well as long term or over multiple years forecasts are only valid as long as the data and assumptions used to create them remain valid because of the dependence on variables and trends no forecast is ever 100% correct but continued analysis and recalculations allow forecasts to be as accurate as possible with easily accessed real-time data many organizations are now better equipped to keep forecasts current as well as make risk assess it's based on those forecasts managers can then accommodate changes in the forecast by adjusting both planned performance and forecast assumptions to better avoid potential crises let's look at an example Jane is the senior sales manager at a global company she is preparing her monthly sales reports to assess how well her department is meeting its quarterly performance goals as set by the company's annual budget to assess current performance and forecast the department's likelihood of meeting its targets Jane asks regional sales managers to provide current sales information that includes past and projected sales by product line changes in the spending habits of key customers inventory levels and pressures from competitors during her analysis Jane identifies two key products with the highest profit margin contribution are over 20% behind the sales forecast a competitor has also entered the market with a similar product priced 10% lower additionally inventory levels of those products have risen by 25% causing operational issues and costs the cascading effect of these changes to the forecast will have a serious impact on both the sales budget and the operational budget Jane and her managers decide to take an aggressive approach to address the issue they devise a multi-phased plan of response beginning with a sales blitz assigning additional sales personnel to key customers and offering current quarter discounts on inventories on-hand a one-time 15% price reduction for this quarter to counter competitive pressures Jane and her team authorize a print advertising campaign emphasizing the advantages of their products finally they initiate a targeted sales campaign to promote those two key products to major customers offering volume discounts and free shipping by using the combination of the organization's sales budget and her forecast of likely future performance Jane is able to adjust her sales expectation response and increase the likelihood that organizational performance goals are at saved without updates Jane would not be aware of major changes to the forecast and subsequent budgets budgets and forecasts are not one-time financial exercises but a day-to-day reference that enables organizations to ensure their future performance as such continuous improvement is the key to accuracy