Difference between Budgeting and Forecasting - Essay Example

Forecasting makes use of past and present data, and trend analysis to estimate sales, or to estimate demands for a product. It uses statistical data in estimation and uses management expertise, knowledge, and judgment (GeminiGeek, n.d. )

2. What is the difference between an operating budget and a cash budget?

An operating budget is a projection of estimated income and expenses that are based on the forecasted sales which are usually done for a short-term period, normally for one year while a cash budget is a way of monitoring the cash flow of a business.  A cash budget makes it easy to see how much money comes in and out for the period, thus, it becomes a simple way to monitor the financial condition of the business or household. A cash budget can be done either on a weekly or monthly period for accurate monitoring (Business Directory, n.d.) 

3. Explain what zero-based budgeting is and how it can improve the efficiency of the company?

Zero budgeting departs from the traditional budgeting wherein all expenses must be justified for every new budgeting period and every function within the organization is analyzed.  Zero budgeting starts from zero and does not take into account the prior year’s budget (Cronin, Tom). For instance, if you have a budget of $20,000 for a campaign in 2011 and it did not produce a good result, the manager must justify why he needs the same budget for 2012.  The manager must develop a plan from zero-base and justify why, where, and how he will spend the money of the company.  In other words, if the manager proposes a campaign for a product, he would pinpoint the projected expenses and profit to show its feasibility so that the company could assign a particular budget for that.  All budget proposals are then analyzed and ranked according to importance.  The system lets the management identify priorities, allows management to compare and analyze the needs of every unit in the organization, and makes funding allocation. In zero-based, budgets are built around what is needed for the coming period, regardless of whether the budget is higher or lower than the previous ones. It does away with the practice of “careless spending” usually found in traditional budgeting that only rolls around the budget. Zero-based evaluates the performance of each activity