Do you know that planning, budgeting and forecasting play an important role in laying out the financial goals of an organisation? Managing these financial aspects of business is very important for a company’s growth. In an organisation, overheads, salaries, and profitability need an all-time attention to track the flow of the processes within an organization.
Laying out a proper planning, budgeting and forecasting process helps an organisation implement better financial aspects, such as financial reports and analytics. As competition is rising in every sector which makes budgeting and forecasting are a basic need for companies. Here, let us know more about planning, budgeting and forecasting in detail.
What Is Planning, Budgeting And Forecasting?
Planning, budgeting and Forecasting, also known as PBF, is a crucial aspect of the financial layout of a company. They are generally used to highlight the short-term goals and long-term goals of a company, making data-driven, informed decision-making for various situations. Planning, budgeting and forecasting are three important aspects that go hand in hand while laying out financial planning for a company.
What Is Planning?
Planning in a business is sorting or identifying an organisation’s long-term goals and strategies to achieve these objectives. When you come front with questions like “Where does your business want to go and how are you planning to get there?”, that is something you can answer only when you have your financial planning and strategies already prepared.
Planning might either begin from scratch or when a company is looking to expand into new markets with new products or increase market share. It is basically a big-picture roadmap for growth that aligns with all departments towards a common objective. For example, suppose a company’s goal is to expand its revenue from $5M to $10M this financial year. Now, the first thing the company will do is to prepare a proper strategic plan to achieve this goal.
What Is Budgeting In Business?
Budgeting is a process of laying out a feasible plan based on a company’s revenue and expenses over a specific period. A company creates a complete plan to spend its money. This spending plan is known as budgeting. With a proper budgeting plan, you can determine whether or not your company is ready for this much expenses for the things you are planning to do.
Budgeting is important in business as it enables businesses to plan, monitor, and control their overall finances effectively. It helps businesses set up a clear goal and objectives. Let us check some major benefits of budgeting below.
What Is Forecasting?
Planning, budgeting and forecasting ensure the company is moving towards its financial and strategic goals. Forecasting in business is a prediction of the future related to a financial market share or a specific scenario. It is a practice of predicting future financial outcomes based on past data, performance, and market conditions.
Budgeting and forecasting go hand in hand, but unlike budgeting, forecasts are updated regularly, i.e., monthly or quarterly, to reflect changes based on various criteria.
Benefits of Planning, Budgeting and Forecasting
A better planning, budgeting and forecasting layout can help a business grow with less chances of risks and losses. Let us now highlight the important advantages of the three major financial metrics in a business.
Benefits of Planning
- Planning outlines the long-term goals and sets a clear roadmap for the business.
- With planning a better cash flow, planning and budgeting can be carried out.
- A clear growth roadmap is possible with strategic planning
- It encourages better resource allocation, leading to less financial waste.
- Proper planning keeps your team informed and works towards a common objective with a clear vision and focus.
Benefits of Budgeting
- Budgeting ensures the resources are available with proper allocation.
- It prioritises important deliverables and projects first, ignoring distractions.
- It shows a clear and feasible path to achieve the company’s goals.
- Budgeting monitors and manages a company’s cash flow, maintaining its overall financial health.
Benefits of Forecasting
- Forecasting prepares a company for better financial management in unpredictable scenarios.
- It ensures realistic Budgeting and planning.
- It assesses the long-term viability of a business plan
- It can anticipate or predict the impact of new expenses or revenues.
- Better resource planning to initiate investment decisions, enabling quick pivots when market condition changes.
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Challenges In Planning, Budgeting And Forecasting
There are many challenges when laying out planning, budgeting and forecasting for a business financial model. Let us check some major challenges in all three financial metrics.
Challenges of Financial Planning
- Lack of verified, misleading, and accurate data leads to inappropriate financial planning.
- Uncertain market conditions due to rapid economic, political, and technological changes lead to less reliable long-term financial planning.
- Big gap between different sources within the organisation, making it difficult to unite the entire company’s data in a single entity.
- Continuous unrealistic targets and goals can demotivate employees and strain resources.
- Lack of proper alignment between teams can create conflicts while working towards a common goal.
- Major pushback from stakeholders and other departments with different visions, leading to different levels of risk.
Challenges of Budgeting
Budgeting is an important aspect of financial planning, but it is not always easy to frame a final budget including all major investments of a business for a given time frame.
- With inaccurate financial data, poor budget estimations are likely to take place, leading to financial losses and wastage.
- It is difficult to decide on an ideal number of inputs or suggestions that need to be entertained while framing the budget, which is also too difficult to achieve.
- Budgeting can take a lot of time, with cases also showing where the budget passes or overruns the decided amount.
- There is no universal method of budgeting, as there are different types of budgeting suited for different conditions, like activity-based budgeting, top-down budgeting, bottom-up budgeting, zero-based budgeting, and more.
- Lack of communication and proper records leads to an inefficient final budget.
- People in top roles, such as managers, might inflate the budget needs to get more funds.
Challenges of Forecasting
Implementing an efficient forecast is a tedious task that requires taking every important aspect into consideration.
- Forecasting is collecting, cleaning, and performing analysis on data, which is complicated and error-prone.
- Past trends might not always be accurate or capable of predicting future outcomes accurately.
- Regular forecasting requires properly skilled analysts, tools, and time.
- Businesses might suffer losses when over-relying on forecasting software without considering human judgment.
- It is difficult to lay out a long-term forecast accurately due to frequent market changes.
Let us now briefly understand the major differences between planning, budgeting and forecasting in the article above.
What Is the Difference Between Planning, Budgeting and Forecasting?
Let us check the differences each of these financial metrics contains to better understand planning, budgeting and forecasting.
Planning vs Budgeting
Planning is a strategy, while budgeting is a tactic.
Planning is used to set the direction i,e. It defines what a company wants to achieve and why. For example, a retail company might plan to expand into three new cities next year to grow market share.
Budgeting, on the other hand, turns the strategy made during planning into numbers, outlining how much money will be spent on opening new stores, hiring staff, running ads, and setting up logistics. In short, the plan says “what and why”, while the budget says “how much and where”.
Planning vs. Forecasting
Planning and forecasting work hand-in-hand for businesses, but with completely different purposes.
Planning is all about deciding what steps a company should take to reach its goals. While forecasting is all about making predictions about what is likely to happen based on past data, trends, and market conditions, if the company follows the plan.
For example, a SaaS startup might plan to double its revenue by launching a new product. The forecast is based on current sales data and market trends, which might show that growth will only reach 70% unless marketing spend is increased. So, the plan directs the forecast, and the forecast helps refine the plan.
Budgeting vs Forecasting
Budgeting and forecasting are interdependent, where one is about allocating resources, while the other is about predicting outcomes.
A budget is fixed for a fixed period of time, highlighting expenditure and investment on different processes. it might state that $500k is allocated for hiring and product development this year. A forecast, however, is more flexible using real-time data to show whether that $500k will be enough or if adjustments are needed during the complete lifecycle.
For example, a company might budget for 5 engineers, but the forecast shows they will need at least 7 engineers to meet deadlines. In this case, the budget sets the limits, while the forecast tests those limits against reality i,.e. feasibility.
Planning vs Budgeting vs Forecasting
Planning is a part of financial decision-making where a business sets the goal for a financial year when introducing a new product in the market or increasing revenue. For example, the goal for the financial year 2025-26 is to increase revenue by 25%.
Now, budgeting here sets the resources, makes an analysis, and shows the real expenditure required to meet the strategic planning. For example, we need to spend $1M on marketing, sales, and staff training to make this planning possible. Forecasting comes into the picture to predict the results i,e. If the company follows the current strategy, it can register a growth of approximately equal to 18%, so adjustments are needed.
This is how together planning, budgeting and forecasting create a complete, continuous cycle for a business.
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Planning, Budgeting And Forecasting FAQs
Q1. What is Planning?
Ans: Planning in a business is sorting or identifying an organisation's long-term goals and strategies to achieve these objectives. It is also known as strategic planning.
Q2. What is budgeting?
Ans: Budgeting is a process of laying out a feasible plan based on a company’s revenue and expenses over a specific period. A company creates a complete plan to spend its money. This spending plan is known as budgeting.
Q3. Are budgeting and forecasting the same?
Ans: Budgeting and forecasting ensure a company achieves its goals, but budgeting is a fixed financial planning, while forecasting is a dynamic prediction that might change frequently.
Q4. What is the difference between planning and budgeting?
Ans: Planning is used to set the direction for a business, while budgeting converts the strategy into numbers outlining the amount needed to spend on different processes to achieve goals.
