What is the key difference between a budget variance and a financial forecast?

• A. Forecast predicts past financial performance.
• B. Variance compares actual results to the planned budget; forecast predicts future financial performance based on current data.
• C. Variance is a projection of future cash flows; forecast explains past results.
• D. They are the same concept.

Answer: (B)

A budget variance vs. a financial forecast hinge on timing and purpose. A budget variance is a retrospective measure that compares what actually happened to what was planned in the budget for a given period, highlighting where performance diverged from the plan. A financial forecast, on the other hand, is forward-looking and estimates future financial performance using current data, trends, and reasonable assumptions.

This distinction is why the correct choice is the best: it states that a variance looks at actual results against the budget (retrospective), while a forecast predicts future performance based on current information. For example, if actual revenue comes in below the budget, that difference is a variance to investigate. A forecast would take the latest sales data and market conditions to project next quarter revenue and cash flow.

The other ideas mix up timing or purpose: one describes forecasting as predicting past results, which isn’t correct, and another reverses the roles of variance and forecast. They aren’t aligned with how budgets and projections are used in planning and control.