Part 9 of Mining Man's "Mining Financial Basics" series looks at two very common terms in the mining industry - Budget and Forecast. We discuss their importance, and their differences.
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Welcome to Part 9 of Mining Man’s Mining Financial Basics series. In this part we are looking at two very common terms you will hear around mine sites and mining companies – budget and forecast. We will discuss what each term means, and what the differences are between them.
As a leader in the mining industry, it is highly likely you’ll be asked to prepare or have input into a budget or a forecast, and it’s important to understand the difference.
Budget and forecast are closely related - both are terms used to describe a forward looking plan. This plan could be about financial figures, production numbers, manning levels, capital costs, or any other measure.
A budget and a forecast are all about what we expect and plan to do in the future. In practice, a budget and a forecast both look the same, usually a series of tables or documents containing all the expected numbers for each relevant measure, broken down into monthly or yearly periods.
Budget
A budget is a set of expectations set before the start of a particular period. The budget sets out the expected costs, tonnes etc for a period which has not yet started. For example, when we are developing the budget for 2011, we would put this together late in 2010, with the aim of finalising and locking it in before 2011 started.
An annual mine budget can take up to six months to put together, starting with the mine plans and schedules, and then working out the expected capital and operating costs required to achieve these plans.
It is common for mining companies to use annual budgets, covering the year ahead in high levels of detail. The budget documents will usually also look further out, with less accurate plans extending up to five years ahead (or even the life of the mine).
Forecast
A forecast is a review of the budget during the budget period. A forecast is done to update the remaining part of the budget period. For example, usually after the first three months of the year, we might update the annual budget and change our expectations and plans for the final nine months.
We would call this a quarterly forecast. So following our 2011 annual example above, in March 2011, we would look at the actual cost and production figures for the year to date (i.e. January – March), and then forecast the figures for the remainder of the year (i.e. April – December).
The forecast is always combined with the “actuals” already achieved to work out what the expected results are for the full period.
When we do a forecast, we don’t throw away the budget, as it is still important to refer back to as our original plan and compare against it to see how we are going. The budget would have been signed off right up the corporate tree, and this is usually what the mine is still expected to stick to, even if our forecast figures have changed. The forecast gives people above us an indication of how we are tracking to our budget plan.
Budget vs Forecast
Budget and forecast are mostly similar, and usually identical in the types of numbers they are measuring (i.e. tonnes, dollars, incidents).
Budgets are usually much more detailed and may contain large amounts of written reports to support them and justify them to head office. Forecasts are usually just focussed on the numbers themselves and any significant changes to the assumptions made in the original budget.
The key difference between budget and forecast is that budget is done before the start of the period, and forecast is an update completed during the period.
What it means for you
Depending on your role, you may be involved in developing the budget for your department, mine, or company. This will involve estimating or reviewing the expected production figures, manning numbers, costs, capital requirements etc.
During the year, you might then be involved in reviewing these budget numbers and looking ahead to see if anything has changed from what you initially assumed in the budget. These changes in assumptions or expectations will then become the forecast (also sometimes called a reforecast).
Do you work at a mine or mining company and have any stories about the frustrations of budgets and forecasts that you’d like to share – please leave a comment below!
In Part 10 of this series, we are looking at accruals - a complex accounting technique which needs the input of non-financial managers from the mine site. Click here to move on to the Part 10 article on accruals, where we explain what they are, why they're important, and what they mean for you.
- Jamie Ross
Mining Man - Great Safety, Leadership and Productivity Ideas for the Mining Industry
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