Capital budgeting and forecasting have some basic similarities. Both involve tools for anticipating financial needs and changes in the company’s immediate future. Additionally, both concepts utilize previous information to create conclusions and powerful analysis.
The future can never be predicted in anyway as sales change on a daily basis. Therefore, one important similarity is the uncertainty within both of these concepts and the understanding that there will always be blind spots within the reporting. Regardless, the value of these techniques are indispensable as they focus on the value of production, expansion, and growth (Gitman, 2006).
The two financial planning concepts have several differences as well. Capital budgeting is a decision making process where the concepts can be accepted for capital venture or rejected for any number of reasons. Forecasting is simply an anticipation of sales goals and expectations. In the same respect, if a capital budgeting plan includes a project that is not successful it is difficult to reverse the damage that has been done. With forecasting, analysis can conclude reasons for the downfall and potentially tweak the process to avoid additional crashes.
Capital budgeting is the process of making long-term decisions for the company while forecasting is based on short-term qualifications. Forecasting typically projects cash flow for the next calendar year while capital budgeting projects can take 5-10 years to see through fruition. The long-term projects are usually more integrated with marketing plans and strategic goals while forecasting focus’s on cash and profit planning. The capital budgeting process can be used to improve the projections forecasting provides (Gitman, 2006).
Forecasting, if done properly, can have some great advantages. First of all, the information projected from this technique can assist the finance department when creating and maintaining a budget. The budget acts as a guide or map for spending, earning, and financial achievements. Secondly, the forecasting projections can foster communication and collaboration as it acts as a motivator or set goal that the company would like to reach. The activities involved with forecasting can also be valuable to managers and their management methods as the information will make them more sensitive to change and the relative factors of change. An additional benefit of forecasting is the overall improvement of quality plans which emerge because of it. These tasks help to clarify underlying factors that increase or decrease production and sales and can help evaluate risks more efficiently (CTU, 2007).
