Budget vs. Forecast vs. Actual - Avoid These Costly Errors

For most nonprofit professionals, a lack of alignment between the budget, forecast, and actuals can be concerning when the board asks for mid-year financials.

You'll want to understand the key differences between budgets, forecasts, and actuals to streamline decision-making and promote sustainable financial health. 

Luckily, you can use modern nonprofit financial management software. 

For example, Martus helps you create multiple budgets, generate multiple forecast scenarios, and analyze actuals all in one platform.

Get Martus today to optimize how you manage your nonprofit finances.

TL;DR - Budget vs. Forecast vs. Actual

Let's start with a quick overview of the three elements.

What Is a Budget? 

A budget is an elaborate financial plan that shows an organization's expected revenues and expenses over a specific period, typically a fiscal year. 

The plan outlines how you'll allocate resources to support your programs and activities. 

Let's say you are planning to launch a new after-school tutoring program with a program-specific budget that includes:

• Projected revenues of $30,000 in the form of a grant and an extra $10,000 in donations.
• Expected expenses of $15,000 for staff, $7,000 for supplies, $3,000 for meals, and $4,000 for staff transport.

How to Create an Effective Budget

You can use the strategies below to create a practical budget.

1. Consult Program Leads Early: Engage department or program managers early in your nonprofit budgeting process to promote accuracy and ensure they own the process. Their views can help you match the budget with actual program needs and expected changes.
2. Use Historical Data and Funding Projections: Analyze your past spending patterns to establish realistic baselines. You can integrate new funding projections to adjust for growth, underfunding, or changes in priorities. You can also include multi-year data when possible to spot trends and improve planning. 
3. Tag Line Items by Fund or Restriction: Use your nonprofit accounting software and Martus as your financial management platform to label each budget item with its funding source and any restrictions. Doing so will help improve compliance, reporting, and decision-making. 

For all these steps, you can use a collaborative budgeting tool to make things easier. 

Martus is a cloud-based platform dedicated to nonprofit financial management, allowing multiple stakeholders to input and review data in real time to promote accuracy. 

Check out Martus today to discover these budgeting abilities in detail. 

What Is a Budget Forecast? 

A budget forecast is an ongoing financial projection that updates expected revenues and expenses based on the most current data available.

In a nonprofit, you can update your budget forecast throughout the fiscal year based on grant updates, program changes, or donor trends. 

Budget forecasting is important for several reasons:

• Staffing Decisions: You can determine when to hire, restructure, or pause recruitment based on the forecasted cash flow and program needs. 

• Capital Expense Planning: You'll know the best timing for major purchases or investments because you can see when funds may be available or when it would be best to delay. 

How to Forecast a Budget

You can create an effective nonprofit budget forecast in a few steps:

1. Review Actuals to Date: Use a budget variance analysis to compare actual income and expenses against your original budgets. Look for variances and trends, such as underspending or delayed grants. You can use year-to-date (YTD) reports to improve accuracy. 
2. Adjust Remaining Months: Create projections for the rest of the fiscal year based on confirmed funding or revenue losses, expected changes in operations, and seasonality (such as year-end donation spikes). You can also revise your estimates for both revenue and expenses. 
3. Document Assumptions: Note the rationale behind all the projections or forecast changes to ensure transparency and make future forecasting easier. For example, "delayed hiring of Program Lead to Q4". 
4. Share with Stakeholders: Showcase the forecast to program leads, the board's finance committee, and top leadership. Ask them for their input and concerns to ensure shared accountability and understanding. 

What Is Actual in Budget? 

In a nonprofit's budget, actuals are the real, recorded financial data drawn from your accounting system showing what revenue you have earned or the expenses you have incurred in a specific period.

Actuals are the basis for accurate budget forecasting and financial reporting. They show how your organization is performing and tracking compared to the budget, which helps you discover overspending or underspending early. 

Your finance and program teams must collaborate to keep actuals accurate and meaningful based on what is happening on the ground. 

The finance team records and reconciles data regularly, while the program team shares on-the-ground updates like delayed hiring or spending changes. 

How to Track Actual Performance

Tracking actual financial performance helps you stay informed, make timely decisions for the next fiscal year, and remain accountable to your funders. 

You can track actuals in the following ways. 

1. Run Monthly Financial Reports: Use your accounting system (bookkeeping, accounting tool, and financial management software) to create and review monthly actuals. Compare these against the approved budget to uncover overages, shortfalls, or trends. You can include key reports such as Budget vs. Actual and Cash Flow Summary.
2. Use Dashboards for Visibility: Use dashboards in your accounting system and financial management software to visualize metrics such as revenue, expenses, and net assets. You can also track performance by grant, program, or department and give your leaders and program staff real-time insights. 
3. Match Actuals to Budget Categories: Align actual transactions with the correct budget categories or line items and funding sources. You can use accounting tags, classes, or project codes to maintain accuracy. Matching this way is important for restricted grants to show compliance and program-specific budgets to ensure accurate expense tracking. 

Relevant Characteristics Between Budget, Forecast, and Actual

Consider this quick overview of the defining characteristics between budget, forecast, and actuals in a nonprofit.

Similarities and Differences

From the above table, we can note that budgets, forecasts, and actuals are similar and different in various ways. 

Budget, Forecast, and Actual Differences 

While budgets are static once approved, forecasts are adaptive and change over time as circumstances change. 

Actuals are factual and can't be changed because they are real financial results. 

Budget, Forecast, and Actual Similarities

Budgets, forecasts, and actuals are similar since they are all required for financial visibility, flexibility, and accountability.

The three are also based on financial data, require collaborative responsibility, and help organizations make informed decisions. 

Additionally, all three activities require nonprofit accounting tools and financial management software. 

For example, you can integrate Martus with your accounting tool to import the actuals you need to compare your budget and forecasts. 

Martus allows both your financial and nonfinancial teams to collaborate when budgeting, forecasting, analyzing actuals, or reporting. 

Schedule a customized Martus demo to see how you can streamline your financial management processes. 

What About Variance?

A variance analysis is the process of comparing budgeted expenses and revenue to actual financial results to identify and understand the differences. 

A nonprofit budget variance analysis helps you identify underspending or overspending and highlight unexpected revenue. 

The process also supports grant compliance by tracking restricted and unrestricted spending. 

You can also use a variance analysis to guide decisions regarding staffing, scaling programs, or controlling costs. 

You'll want to conduct monthly or quarterly variance reviews with your program leads and finance team to promote proactive planning. 

You can investigate why specific variances happened and use the insights to adjust your budget forecasts, reallocate resources, or realign your mission. 

Bottom Line

A clear understanding of budget, forecast, and actual helps you plan better, spend smarter, and enhance your organization's impact.  

The good news is that you can align all three processes and views in one place with the right financial management platform. 

You can use Martus, your dedicated nonprofit financial management software, to budget, forecast, and prepare detailed budget to actual reports. 

Martus allows you to create unlimited budgets with unlimited budget lines and create and compare multiple forecast scenarios. 

You can even update and adjust forecasts throughout the year to align with changes in your organization.

Martus also pulls real-time actual data automatically from your accounting tool to enable precise forecasting, reporting, and variance analysis. 

Request a personalized demo today to see how Martus can help you create financial budgets and forecasts and analyze actuals all in one place. 

Frequently Asked Questions (FAQs)

Have questions about financial budgets, forecasts, and actuals? We have the answers. 

How Does Budget vs. Forecast vs. Actual Impact Business Decisions?

Budget, forecast, and actual each help nonprofit and business decision-makers by guiding strategic planning, supporting timely adjustments, and ensuring accountability. 

For example, you can make data-informed decisions on staffing, spending, and program priorities throughout the fiscal year. 

How Often Should Businesses Update Forecasts?

Nonprofit organizations and businesses should update their financial forecasts monthly or quarterly to ensure the projections remain accurate and aligned with ongoing changes. 

With Martus, you can reforecast dynamically throughout the year, creating and comparing multiple scenarios to get ready for various potential situations. 

What Is Included in a Budget to Actual Report?

A budget to actual report typically includes:

• Budgeted amounts for various income and expense categories for nonprofits
• Actual revenue and expenses the organization received or spent
• Variance (amount and percentage)
• Notes to explain significant variances
• Recommendations.

Why Businesses Need Both Budget and Forecast for Planning?

Nonprofit organizations and businesses need both budgets and forecasts for planning because the two are complementary. 

The budget sets a fixed financial plan and performance goals for the fiscal year. 

The forecast models different financial scenarios to respond proactively to outcomes, including adjusting your budget in the next fiscal year.