A lot of financial terms can be difficult to understand, but once you grasp their meaning and their relevance, it is easier to understand why we need them. These terms are important when you are aiming for financial literacy or to enhance your financial knowledge.
A simple example of financial jargon is the terminology that you come across when you read the terms and conditions of your life insurance policy. Your life insurance company can help you with the financial terms, but it is equally important for you to build this knowledge on your own as well.
Two such terms are financial forecasting and budgeting. Since many people do not understand such complex jargon, they may also not understand why budgeting or financial forecasting is essential in finance. And hence, let’s look into what these terms mean and their role in finance.
Meaning of Budgeting
A budget is a financial plan or a detailed statement of one’s income, expenditures, investments, and savings. All of these heads are calculated for a given period, usually a year. The plan is itemised to clarify the distinction between each of the expenses, investments, and income.
When an organisation is setting up a budget, it is necessary that various divisions of the company should include their plans in the budget so that all the incomes and expenses can be accounted for. Budgets may be prepared for the financial year and can be static for the next financial year or quarter. It is acceptable to have a fixed budget or financial plan that suits the needs of the organisation. Otherwise, the financial plan is altered to match the company’s changing requirements.
However, it is important to note that a budget, though well-planned, can be difficult to keep up with, which leads to minor discrepancies in actual situations and expenses.
People also make personal financial plans or budgets for household and personal expenses. This can be done by listing down the total income received for the month, followed by essential expenses such as utility bills and EMIs.
In the next section, the investments such as life insurance plans and savings are considered, depending on how the individual wants to invest their money. The last head of the financial plan is the expenses meant for leisure and entertainment, such as dining out, vacations and so on.
Meaning of Financial Forecasting
Financial forecasting is an estimate or evaluation of the financial future. When preparing a financial forecast, numbers and statistics are extremely important; however, much like a budget, these figures may or may not be met. These figures are prepared so that the various costs of production, resource procurement, and other financial needs of the organisation or the business can be met.
The study of past financial data or historical data may be important for financial forecasting or financial planning. However, it is mainly prepared after examining the current financial trends of the company rather than the organisation’s past performance. The forecast may change to gauge if the financial plan is on the trajectory and how it can be met.
Financial forecasting can help the organisation prepare their inventory on the basis of the forecast, and a long-term forecast can be important to help the company create a complete business plan. The advisors carrying out the forecast may need to refer to the company’s financial documents for the same.
Financial forecasts are a projection of all the expenses, incomes and results that can occur when financial planning is being carried out, or the budget is being executed. Financial forecasts are made for a financial year, a quarter, or a month.
Long-term financial forecasting is important for outlining future business strategies that can help sustain the company in the times to come, while short-term financial forecasting aids in the daily business activities undertaken over the course of a week or month.
Role of Life Insurance in Financial Forecasting and Financial Budgeting
Life insurance is an important aspect of financial forecasting and budgeting because it helps to protect against potential financial losses in the event of the policyholder's death. By purchasing a life insurance policy, individuals can ensure that their loved ones will be financially secure in the event of their passing. This can provide peace of mind and help individuals to focus on their financial goals and budgeting without worrying about the potential financial burden that their death could place on their family.
In addition to providing financial protection for loved ones, life insurance can also be an important tool for financial planning, forecasting, and budgeting. It can help individuals to plan for their retirement and other long-term financial goals by providing a steady stream of income that can be used to supplement their savings and investments.
The death benefit of a life insurance policy can also be used to pay off debts, mortgages, and other expenses, which can help to simplify the financial planning process and make it easier to budget for the future.
Furthermore, life insurance policies, particularly term insurance plans, can be relatively inexpensive opposed to other types of insurance, such as health or property insurance. This makes them an affordable option for many individuals, which can help to make budgeting for life insurance easier.
Overall, life insurance is an important aspect of budgeting and financial forecasting because it can provide financial security for loved ones, help to meet long-term financial goals, and can be relatively inexpensive.
Difference between Budget vs Forecast
These are some points of distinction between budgeting and financial forecasting:
Aim
A budget is planned for a certain period of time to help the organisation or the company follow the outline prepared for the income, expenses, and investments to be made. On the other hand, financial forecasting is carried out to gauge if the budget goals can be met by the company over a predetermined time period.Process
Budgeting is based on the availability of the current resources at hand while also considering the past performance of the organisation. A financial forecast considers and examines the current financial trend of the organisation to determine the future outcome of a financial plan.Timeline
Budgets, though planned periodically, are created for a year or a few years, after which the plan can be changed or altered on the basis of the results. However, financial forecasting is an ongoing process that may change as and when needed to keep up with the needs of the financial plan. This is an important difference between planning and forecasting.Scope
Budgeting considers the incomes and various expenses in an organisation so that a budget can be set. The plan may include referring to the company’s previous balance sheets. Though financial forecasters may also need access to the company’s financial documents, they mainly examine the ongoing trends and the progress of the current financial plan.
Conclusion
Budgeting and financial forecasting are meant to work in sync with one another. Since a budget is created before a financial forecast, the forecast can track if the budget achieves its goals. However, in the case of long-term financial forecasting, the budget is set after an initial forecast that takes information and data from past budget plans.
L&C/Advt/2023/Jan/0247