Planning, budgeting, and forecasting are three financial terms that most people, even in the corporate world, often confuse. Maybe it’s because they often go hand in hand? Maybe. But all three are separate terms and topics.
Planning, budgeting, and forecasting is a three-step strategic planning process that allows a company to determine and detail short- and long-term financial goals.
Planning provides an outline of a company’s financial objectives, typically in the next three to five years. Budgeting includes all the details on how the plan will be carried out each month. Forecasting makes the most out of historical data and current market situation to predict how much revenue a company can expect in the future.
Let’s see exactly these terms differ, step by step.
Planning can be defined as a tactical process in which the long-term direction of the company is defined. The result is a financial plan that outlines the company’s financial objectives and specifies a course of action to accomplish those objectives.
Budgeting allocates financial resources to various expenses, such as production, marketing, or even payroll. Budgeting often includes revenue and expenses estimates, as well as the expected cash flow and debt reduction. This process is usually done at the beginning of the fiscal year. Then, the budget is compared with actual financial statements each month to calculate the discrepancy between the two and make any necessary changes for the future.
Forecasting is a very important tool that allows companies to ensure the consistency of planning and budgeting. It can be explained as a process during which performance data, industry trends, and subjective analysis are translated into projected outcomes.
Now that you’re familiar with the basic concepts of planning, budgeting, and forecasting, let’s compare them in greater detail.
Planning vs. Budgeting
Both financial planning and budgeting reflect estimations of the company’s future objectives. However, there is one significant difference. A financial plan can refer to a longer time period (up to five years). In contrast, a budget plan is reviewed and revised at the beginning of every fiscal year or in accordance with unexpected events.
Also, planning always precedes budgeting so that the company has an idea of what they are budgeting for.
Planning vs. Forecasting
The most significant difference between a financial plan and a forecast is that the former focuses on historical performance to project future profitability. Forecast, on the other hand, outlines possible outcomes and actions needed to achieve those outcomes. In other words, a forecast is what the firm could yield if the company’s situation and industry trends don’t change much.
However, planning implies which financial goals the company desires to exceed the forecast based on the current situation.
Budgeting, planning, and forecasting make it easier for companies to produce more accurate budgets and prepare properly for all those what-if situations. If you are looking to have a custom solution created for your organization, the Planning team at HICO-Group can help you out. From identifying KPIs and setting operational targets to implementing planning tools from scratch and providing on-going technical support, we are the experts you need for your enterprise-wide data planning. Learn more here.
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