What are the key differences between a budget, a forecast, and a target, and how do they interact in a typical FP&A process?
A core FP&A interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
A budget is a detailed, fixed plan for the fiscal year, often used for resource allocation and performance evaluation. A forecast is a dynamic, updated projection of future outcomes, typically rolling, used for decision-making. A target is a strategic goal, often aspirational, set by leadership. They interact: the budget is the baseline, forecasts track progress against budget and targets, and targets inform the next budget cycle. For example, if a forecast shows a shortfall against target, we may adjust spending or revise the budget.
WHAT INTERVIEWERS LISTEN FOR
- ✓Budget: fixed plan for the year
- ✓Forecast: dynamic, updated projection
- ✓Target: strategic goal
- ✓Interaction: budget baseline, forecast tracking, target setting
COMMON MISTAKES
- ✗Using budget and forecast interchangeably
- ✗Confusing target with budget
- ✗Ignoring the dynamic nature of forecasts
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