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Hi,
I understand the main characteristics of a budget and a forecast but I need some clarification on the purpose of a forecast.
If a company reviews Actuals compared to a budget periodically and assess material variances e.g to drive operational decisions to work towards achieving the budget, why then are forecasts needed?
Forecast is a tools to predict future sales/volume activity taking into consideration the environment, it is current and updated continuously.
Is it to be compared to budgets? If so, what purpose is it for managers to know what is likely to happen if the target to achieve is the budget itself regardless of the forecast? Is it to have an idea on the likely hood of meeting the budget so that efforts can be prioritised to meet the budget?Thank you.
I don’t think that the P3 examiner is very interested in the academic difference between forecasts and budgets.
In my book, a forecast (eg a sales forecast) is an attempt to predict the future (eg sales volumes and revenues). Budgets then flow from forecasts sales, production, cash flow etc.
Both should be updated when necessary to keep them relevant.
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