What is the difference between a budget and a forecast?

Think a budget and a forecast are the same thing? Think again. In this video, Steve breaks down the key differences between budgeting and forecasting—and why understanding both is critical to running a financially healthy business.

You’ll learn how each tool serves a different purpose, when to use them, and how they can work together to improve planning, agility, and decision-making. If you want to lead with more clarity and confidence, this is a must-watch.

TRANSCRIPT:

If you're running a business and you want greater visibility into your company, maybe a budget's the right answer, maybe it's not. Today I'm going to walk you through the difference between a budget and a forecast and the principles that I use to turn around and grow businesses. My name is Steve Coughran and I'm the founder of Coltivar.

I've been a CFO of a billion dollar company and I've been a CFO of a million dollar company and everything in between. So let me walk you through what I've learned in the process and help you to avoid similar mistakes that I made early on in my career. Right, here's the traditional budgeting process.

What happens in companies is that top leadership, right, senior leadership in a business, they're like, hey, we need to create a budget for our team down here, like all these employees down on the front line. And they think mistakenly that if they create this performance contract, because essentially that's what a budget is oftentimes, it's just in disguise, right?

So they say, if we create this performance contract and we tell these employees, look, if you meet these numbers right here, then we will give you money. Yay, and everybody will be happy. Well, guess what? Senior leadership, they set these targets. Oftentimes they're aggressive and they don't work out really well and it creates discontent and disengagement with employees.

And nobody knows the numbers because the budget's based on these pie in the sky targets or these over ambitious plans and it's not super helpful. When I was the CFO of this company back in the day, I remember going into our financial strategy reviews early on when I first came on board and I was just sitting back observing and they would run these budget meetings and these leaders would be like, all right, yep. So this month we're down, we're down for the second time in a row since the beginning of the year, but don't worry because in the summer, we're going to crush it.

We got all these contracts coming and then guess what? That would appease management and then everybody would go their own way. Summertime would roll around and they missed the numbers again. They missed the targets and they just play these games, right?

Or on the other side of the equation, business leaders would sandbag, right? In order to meet their quarterly goals, they'd hold back some sales. They'd tell their customers, hold on, don't order this until next week because then it'll roll into the next quarter. They just do these weird games to hit their numbers and it was super problematic for the business, especially for management who wanted greater visibility and ultimately they wanted to drive performance.

So that's why a budget's messed up. The other thing is that it's based on a calendar or fiscal year. And so a company will create this budget, right? It's like 12 months out. Boom, boom, boom, boom, boom. And they're like, okay, they rolled out. Oftentimes it's not rolled out in time. That's another problem in itself.

But they start back here. Let's just say in July, August. They're like, okay, we need to update the forecast. So they update the forecast. It rolls out, let's say in February. They're already into the budget. Time goes on. They're like, boom, boom, boom. They start running out of time.

And then once again, they start the process again in July and August. And then they get done. They don't have a budget that's rolling. And that is the real issue here that I'm trying to illustrate.

You have to have a rolling forecast because you can't just like stop your business and be like, all right, we don't have a budget. We're in the process of working on it, but we'll get to it soon. Instead, I like to look at forecasts because they're rolling and never again do you have to follow this process. That's stupid and time consuming. And it's just a total pain, all right?

The other thing is with budgets, you're like I said up here, you're measuring variances. So you're looking backwards constantly. And that's good for operating finance, but it's not super helpful from a strategic finance perspective because sure, it's good to look back and say, hey, why was your travel expense, you know, $1,000 when we only had forecasted 800? That's a variance of 200.

And you waste your time on all these other little things instead of focusing on what really moves the needle, which is strategy, right? Capital allocation and maximizing cashflow, changing pricing, improving your sales and marketing flywheel or your operational flywheel or your value creation flywheel, right? These things I talk about in my other videos and in my other contents, be sure to check that out. But this right here, this process is broken and it creates a ton of issues.

Here's the last thing I'll bring up. I see this all the time. Here's this whiteboard. A company hires a facilitator. The facilitator's like, we're gonna do SWOT analysis, strengths, weaknesses, opportunities, and threats. We'll call that strategy.

And the company will list out all these things they're gonna do. And really their strategic planning session is just like a to-do list. And they just list out all this crap that they're gonna do in a year. Okay, great. This facilitator gets paid, the company goes their way.

And they're like, all right, now let's convert this strategy, right? This SWOT analysis into a budget. And they're like, okay, so here's what we think we're gonna do. You know, we're gonna come in here and we're gonna just crush it over the next five years. And here's our five-year plan, right?

And what happens is in reality, it's like year one kicks off and it looks like that or sometimes it's flat or sometimes it declines. And then leadership is like, okay, okay. At the end of the year, they're like, that didn't work. We're gonna go back to the drawing board. We need to do another facilitator.

Maybe this one we didn't like, let's find another one. And then they come up with another to-do list. And they're like, okay, this year is gonna be the year. And then they draw out the next five years, right? And it looks like a hockey stick. And then they go execute. Maybe it's a little bit better, but it's far away from like where they thought it would be.

There's this massive gap. So they do the same thing and they repeat it and they're like, okay, this year is gonna be different. And it looks like that. And they keep doing this year over year over year, right? And performance is like that. So this is insanity.

And so many companies do this and they miss their numbers. If you don't believe me, and if you're listening to this, you're like, huh, I don't know if that's true. Look back on your strategy sessions, do a revisit, see what's working, what's not working. Look at your budgets from the past and then compare that to your actuals and you'll find this line.

Unfortunately, or fortunately, who knows? Because maybe it'll lead you to change. Yeah, right. I don't say this to make you feel bad. Guess what? I was in that exact spot, right? Once before, I was doing these wild budgets. I thought like, okay, if I set these targets for my team, then they're gonna like go out there and execute.

But it's really this game that they play. Like leaders are like, all right, here is this jump. And can you like go jump over my arm? And like, I can't jump over that arm. And they get up and they're like, yeah, that's too high, lower it. And they're like, okay, like here? They're like, no, here. And they're here, here, here. And they finally negotiate this like target. And then they run and they jump over it. They're like, see, oh, I accomplished the goal. You should pay me.

So just weird games happen with the budgeting process and setting these targets. I'm not saying setting targets is bad. I'm just saying using a budget as a mechanism to drive performance isn't always helpful.

If you're running a business and you want greater visibility into your company, maybe a budget's the right answer, maybe it's not. Today I'm going to walk you through the difference between a budget and a forecast and the principles that I use to turn around and grow businesses. My name is Steve Coughran and I'm the founder of Coltivar.

I've been a CFO of a billion dollar company and I've been a CFO of a million dollar company and everything in between. So let me walk you through what I've learned in the process and help you to avoid similar mistakes that I made early on in my career.

Right, here's the traditional budgeting process. What happens in companies is that top leadership, right, senior leadership in a business, they're like, hey, we need to create a budget for our team down here, like all these employees down on the front line. And they think mistakenly that if they create this performance contract, because essentially that's what a budget is oftentimes, it's just in disguise, right?

So they say, if we create this performance contract and we tell these employees, look, if you meet these numbers right here, then we will give you money. Yay, and everybody will be happy. Well, guess what? Senior leadership, they set these targets. Oftentimes they're aggressive and they don't work out really well and it creates discontent and disengagement with employees. And nobody knows the numbers because the budget's based on these pie in the sky targets or these over ambitious plans and it's not super helpful.

When I was the CFO of this company back in the day, I remember going into our financial strategy reviews early on when I first came on board and I was just sitting back observing and they would run these budget meetings and these leaders would be like, all right, yep. So this month we're down, we're down for the second time in a row since the beginning of the year, but don't worry because in the summer, we're going to crush it. We got all these contracts coming and then guess what? That would appease management and then everybody would go their own way.

Summertime would roll around and they missed the numbers again. They missed the targets and they just play these games, right? Or on the other side of the equation, business leaders would sandbag, right? In order to meet their quarterly goals, they'd hold back some sales. They'd tell their customers, hold on, don't order this until next week because then it'll roll into the next quarter.

They just do these weird games to hit their numbers and it was super problematic for the business, especially for management who wanted greater visibility and ultimately they wanted to drive performance. So that's why a budget's messed up.

The other thing is that it's based on a calendar or fiscal year. And so a company will create this budget, right? It's like 12 months out. Boom, boom, boom, boom, boom. And they're like, okay, they rolled out. Oftentimes it's not rolled out in time. That's another problem in itself. But they start back here. Let's just say in July, August. They're like, okay, we need to update the forecast.

So they update the forecast. It rolls out, let's say in February. They're already into the budget. Time goes on. They're like, boom, boom, boom. They start running out of time. And then once again, they start the process again in July and August. And then they get done. They don't have a budget that's rolling. And that is the real issue here that I'm trying to illustrate. You have to have a rolling forecast because you can't just like stop your business and be like, all right, we don't have a budget. We're in the process of working on it, but we'll get to it soon.

Instead, I like to look at forecasts because they're rolling and never again do you have to follow this process. That's stupid and time consuming. And it's just a total pain, all right?

The other thing is with budgets, you're like I said up here, you're measuring variances. So you're looking backwards constantly. And that's good for operating finance, but it's not super helpful from a strategic finance perspective because sure, it's good to look back and say, hey, why was your travel expense, you know, $1,000 when we only had forecasted 800? That's a variance of 200. And you waste your time on all these other little things instead of focusing on what really moves the needle, which is strategy, right?

Capital allocation and maximizing cashflow, changing pricing, improving your sales and marketing flywheel or your operational flywheel or your value creation flywheel, right? These things I talk about in my other videos and in my other contents, be sure to check that out. But this right here, this process is broken and it creates a ton of issues.

Here's the last thing I'll bring up. I see this all the time. Here's this whiteboard. A company hires a facilitator. The facilitator's like, we're gonna do SWOT analysis, strengths, weaknesses, opportunities, and threats. We'll call that strategy. And the company will list out all these things they're gonna do. And really their strategic planning session is just like a to-do list. And they just list out all this crap that they're gonna do in a year.

Okay, great. This facilitator gets paid, the company goes their way. And they're like, all right, now let's convert this strategy, right? This SWOT analysis into a budget. And they're like, okay, so here's what we think we're gonna do. You know, we're gonna come in here and we're gonna just crush it over the next five years. And here's our five-year plan, right?

And what happens is in reality, it's like year one kicks off and it looks like that or sometimes it's flat or sometimes it declines. And then leadership is like, okay, okay. At the end of the year, they're like, that didn't work. We're gonna go back to the drawing board. We need to do another facilitator. Maybe this one we didn't like, let's find another one. And then they come up with another to-do list.

And they're like, okay, this year is gonna be the year. And then they draw out the next five years, right? And it looks like a hockey stick. And then they go execute. Maybe it's a little bit better, but it's far away from like where they thought it would be. There's this massive gap. So they do the same thing and they repeat it and they're like, okay, this year is gonna be different.

And it looks like that. And they keep doing this year over year over year, right? And performance is like that. So this is insanity. And so many companies do this and they miss their numbers. If you don't believe me, and if you're listening to this, you're like, huh, I don't know if that's true. Look back on your strategy sessions, do a revisit, see what's working, what's not working.

Look at your budgets from the past and then compare that to your actuals and you'll find this line. Unfortunately, or fortunately, who knows? Because maybe it'll lead you to change. Yeah, right. I don't say this to make you feel bad. Guess what? I was in that exact spot, right?

Once before, I was doing these wild budgets. I thought like, okay, if I set these targets for my team, then they're gonna like go out there and execute. But it's really this game that they play. Like leaders are like, all right, here is this jump. And can you like go jump over my arm?

And like, I can't jump over that arm. And they get up and they're like, yeah, that's too high, lower it. And they're like, okay, like here? They're like, no, here. And they're here, here, here. And they finally negotiate this like target. And then they run and they jump over it. They're like, see, oh, I accomplished the goal. You should pay me. So just weird games happen with the budgeting process and setting these targets.

I'm not saying setting targets is bad. I'm just saying using a budget as a mechanism to drive performance isn't always helpful. So let's talk about forecasting.

Forecasting is my BFF. So I'll draw a little heart here because I love forecasting. Unfortunately, a lot of companies don't do it super well. They'll forecast out the income statement, but they're not forecasting out the balance sheet. And they're not getting down to free cash flow, which is most important.

That's what I talk about in this book is cash flow. And I provide all these strategies to maximize cash flow. But in order to do that, you have to have visibility into what your cash flow actually is.

So when it comes to building a forecast, what I like to do is I like to make it rolling. So I build it 36 months out in advance, right? So I have all this right here, boom, boom, boom, boom, boom. And I have revenue all the way down to gross margin, down to operating profit, ultimately down to cash flow, right? And I have the balance sheet on here and everything else. And it's all rolling.

And what's cool is that when this month is done, we have actuals. And I come in here and I add another forecasted month so I always have 36 months at least in my forecast. And that's why it's rolling. So this gives me great visibility.

Now, here's the thing. Here's the caveat, because I'm not that great at forecasting. Nobody's that good at forecasting and predicting the future, in fact. But although these numbers right here will be pretty inaccurate, right? I mean, they'll be somewhat accurate based on historicals and where you think you're gonna go. The key is, is that this becomes an exercise that you perform every single month, which I call the FSR, the Financial Strategy Review.

You pull up the forecast, you look at the numbers, you compare it to expectations and you say, okay, we thought we're gonna do 100 in revenue. We did 110, that's great. But our margin was actually a little bit lower and our cash flow is actually a lot lower than we thought. What's going on?

Then you use this actual performance as a report card to put in place new actions, which are under your initiatives, right? I call these initiatives, actions, results. This is how I execute strategy at Coltivar— IARs, right? But this ties into your strategy here.

If you're not familiar with my framework, be sure to check out my other videos or check out my podcast, because I talk a lot about IARs and how I use them to execute strategy. But ultimately, you're looking at the numbers, you're making adjustments to your actions because your actions are really just hypotheses for how you're gonna move your initiatives forward and your initiatives are ultimately intended to increase cash flow and the value of your firm.

That's how strategy and finance come together, right? So you're looking at your numbers, you're making adjustments, and instead of saying, oh, I got you, like with the budget, when you're measuring variances, you're like, hey, you said this and you actually did that. You're bad, you're naughty, and you shame people and you make them do weird stuff.

You say, okay, we thought cash flow was gonna be a little bit higher. What do we need to do to make it better? Do we need to improve our collection process? Do we need to follow up on some past due AR? Do we need to decrease our inventory? Do we need to like delay our AP, whatever it is, right?

So you're looking at different ways to improve things and then you're making adjustments to these future months here so you have an accurate view of what cash flow is going to look like moving into the future.

So that's why I love forecasting. Number one, it's rolling. Number two, it goes down to cash flow. And number three, it's a mechanism not to control the team, but instead it's a mechanism which helps you to predict what's coming down the line and to make strategic decisions that align back with your strategy so you can increase firm value.

All right, if you don't have a forecast, if you follow the budgeting process, I didn't mean to make you feel bad. You shouldn't feel bad. It's not your fault. This is what's taught in the business world and in business school.

But if you want a new path forward, if you want help with forecasting, if you want to make your accounting and finance department more strategic rather than just operational, that's the kind of stuff we do at Coltivar. I would love to connect with you. Feel free to reach out.

And also, you know what would mean the world to me is in the comment box down below, provide some comments. What type of stuff are you most interested in? What type of topic should I cover in future videos?

I'm here to deliver value to you so you can increase cash flow in your business like I talked about in this book. And to help you increase firm value so you can run your business smarter and not waste a lot of time and energy and money in the process.

All right, that's what I have for you. Thanks for joining me. And until next episode, take care of yourself.
Cheers.