The Old Joel on Software Forum: Part 4 (of 5) - Terminology

Terminology - Budgeting

I haven't had luck with Google, searching for expense or activity related budgeting concepts. Most of the links that came up were either related to the preparation of simple Cash Budgets or with Public/Union Budgets or about Budgeting software tools or with Marginal Costing Concepts of breaking even, variable and fixed costs and the like.

What I'd be interested in would be a web resource that explains the difference between the following terms:

(1) Original Budget
(2) Latest Estimate
(3) Revised Estimate
(4) Forecast
(5) Commitment
(6) Spend

While I do know the meanings of the terms I mentioned above, I'd like to read something more fulfilling, something more profound so I can answer some of the questions I have in mind.

How many times is it possible to revise a latest estimate? If there isn't a restriction on the number of revisions until the month for which the budget is being prepared is closed, then what is the rationale behind a Forecast? A forecast is also, after all, a revised estimate.

I'd be grateful if you can provide me some links.

Sathyaish Chakravarthy
Thursday, February 26, 2004

Sathyaish,

these terms have sligthly different meanings in different organisations (and sometimes within the same organisation. They seem so obvious at first glance that no one bothers to define them).

I suspect your search for an illuminating link will be a tough one but good luck, anyway.

Cheers

Slough Bloke
Thursday, February 26, 2004

The number of revisions an estimate can have is more about the individual business rules than any academic or limit by definition.

If its a Costing use of 'Estimate' then revised estimates are usually because of some negotiation process between buyer and supplier. If that is an important part of the Business, and there are many consulting firms on both sides of that equation that depend on this kind of process, then any system they use should also model it.

Because you're interested in monthly budgets that sounds like its more of a General Ledger question. Then Estimate is more about Revenue coming in and personally I keep fictitious figures away from General Ledgers.

Some account heading may have an annual budget and that is broken down monthly, if that is adhered to rigidly then other than cash flow benefits it would likely be too rigid. What you overspend this month you underspend in some future month.

I haven't come across mixing the terms Forecast and Estimate for the same side of the Ledger. If people use the term Forecast then they'll tend to keep using that for Original Forecast and any Revised Forecast.

i.e. we forecast that sales in the third quarter will be 7% up on sales in the same quarter last FY.

I suppose an individual sales person might estimate some amount of revenue but in terms of the Management Accounts forecast is the more usual term.

Perhaps, it makes it clearer if in my experience you give Estimates and you make Forecasts. So you give estimates to customers and you forecast whether they actually buy from you.

If you Google for 'management accounting forecast standards' you might find some of the links helpful.

Simon Lucy
Thursday, February 26, 2004

Thank you, friends, for your replies.

Due to the individualistic nature of the question I asked, I realize I can get a better answer from your advice: consult the organization whose budgeting behaviour I am studying, and secondly, search google for management accounting forecast standards. I am very thankful for the advise and also for your time.

Sathyaish Chakravarthy
Saturday, February 28, 2004