Budget vs. Forecast vs. Target - What Is The Difference?

When navigating a business via a 3-way (profit and loss, balance sheet, and cash flow statement combined) financial forecast in Fathom there are a few different points of reference that can be deployed.

There can be a budget, a forecast, and a target. On top of that there can even be scenarios, but we’ll exclude them for purposes of this blog.

So what is the difference between a budget, a forecast and a target?

The answer is actually that ‘it is up to you.’ 

For instance, with many clients we keep it simple by treating all of these terms to mean the same thing - the goal. What we are aiming for.

But what if you wish to take advantage of Fathom's ability to split them out? What do they mean?

Again the answer ultimately is up to the user. They can mean anything you like. But for some clients that require more sophistication and nuance to their navigation we often refer to them as:

Budget 

What needs to be achieved? 

For instance the sales team that we are investing in has a budget of $x to break even. We need this to happen in the first 3 months. Ultimately, we want them to achieve 3 times their salary which is $y per month from month 4 onward. 

Forecast

What are we tracking toward?

Using the sales team again, we might find that they hit break even by month 2. Great! But they’re taking more time than anticipated to build up to the desired 3 times salary performance level. 

Is this ok? Speaking with the team what is their revised trajectory? Do they require some support perhaps we did not anticipate at first? Let’s build all of that in and reset expectations. Hitting 3 times salary is a realistic end point, but it might take 2 more months. OK, everyone knows that, let’s go!

Target

We think of this as what we want, or sometimes what is possible?

Coming back to our sales team. They have achieved breakeven. Win! They are on a revised trajectory toward 3 times their salary. Great!

What are they capable of doing? Is 3 times salary shortchanging the business and the sales team? What if they could reach 4 or even 5 times their salary? What kind of bonus or salary revision could this trigger for the employees? What kind of trajectory would this put the business on? Could more happen sooner? 

If so, what investments could be made to help? Could the business decisively reduce price sustainably to drive volume, and outmanoeuvre competitors in the process? Does the price need to adjust to remove cumbersome clients? What about a geographic expansion? Is the business correctly funded to support rapid growth, or is there a risk of the increased speed derailing everything?

Ultimately, you may find you switch between the terms. An updated budget comes from a forecast and you think of that as the target. Alternatively, the budget and targets may be reflected inside the classic baseline, best case and worst case type scenarios that sit inside the forecast. The baseline is loaded as the target that actuals can be compared against inside Analysis. 

The choice is yours. It is simply a matter of thinking about your options and deploying what makes sense to you.