Planning, Budgeting, and Forecasting (PB&F) is one of the three management processes that constitute Enterprise Performance Management (EPM). We have presented the basic principles of EPM and its other two components in a previous post. In this article, we will dive deeper into the PB&F process and discuss the similarities and differences among financial planning, budgeting, and forecasting.
Financial planning vs. Budgeting vs. Financial Forecasting
Financial Planning is a tactical process in which the long-term direction and vision of the organisation are defined. The outcome of this exercise is a financial plan, which generally outlines the organisation’s financial objectives and a course of action toward achieving those objectives.
Financial planning is a top priority and should be a perpetual process as it provides the organisation with a consistent framework to operate upon.
Financial planning sheds light on the much-asked question: Where do I want my firm to be on the competition ladder in, let’s say, the upcoming 5 or 10 years?
Budgeting is a periodical practice of allocating financial resources into all manners of expenses: production, marketing, payrolls, overhead and the like. In other words, budgeting quantifies the expectation of the revenues and expenses that the board expects to meet in order to align with the organisation’s objectives. The process typically starts at the beginning of every fiscal year and is based on actual past performance figures and expected profits.
At the end of each period, the budget is collated with actual results for better planning in the future.
Budgeting helps the board reach a satisfactory answer to the question: How should I spend money in an effective manner to meet my firm’s expectation?
Forecasting refers to a financial function whereby recent performance data and subjective analysis are translated into projected outcomes. Forecasting is an integral tool that enables the board to make optimal adjustments in line with its objectives and expectations, thereby ensuring the consistency of planning and budgeting.
On a side note, rolling forecast, by continuously re-projecting the next twelve months at the end of every quarter, is now in widespread practice thanks to its reliable capability. In contrast, the conventional fixed forecast is implemented annually or semi-annually, the upside of this method is less time-consuming.
Forecasting addresses an organisation-wide concern: given the volatile nature of the market in which my organisation strives, what measure should I take to keep it on track toward realising its goals?
Let’s assume that you have grasped at least to some extent the basic concepts of Planning, Budgeting, and Forecasting. Nevertheless, there is some vagueness all about them that remained. So how can I tell a financial plan from a budget? Or in which ways planning is different from forecasting? They seem to inextricably intertwine with each other in a confusing financial thread.
Drawing fine lines separating Financial Planning, Budgeting and Forecasting
Financial Planning vs. Budgeting
Suffice it to say that the most distinct difference between a Financial Plan and a Budget is the timeframe that they stretch out. A financial plan can be utilised as a strategic tool on a long-term basis (up to 5 years.) Whilst a budget is reviewed and revised at the beginning of every fiscal year, along with a number of adjustments in accordance with unexpected events throughout that period.
Although they all reflect expectations and estimations of future objectives, there is a critical difference. Financial planning lays the foundation for budgeting, suggesting that a financial plan must precede the budget so that the board gets an idea of what they are budgeting for.
Financial Planning vs. Forecasting
A financial plan lays extensive focus on historical performance data and subjective analysis to project the future profitability of the organisation. A forecast, on the other hand, details possible outcomes and corresponding measures to achieve those outcomes by extrapolating available resources.
In plain language, a forecast is what the firm could yield if nothing much changes compared to the past, whereas a financial plan implies what the board desires and what the company has to do to exceed the forecast.
A holistic approach to Financial Planning, Budgeting, and Forecasting
More than usual, people see PF&B as merely a value-added and cumbersome function that is conducted by the Finance department alone and is not necessarily aligned with other departments. This widespread misconception creates a gap that is hard to bridge, making the overall PBF process highly fragmented.
Our view is that PB&F thoroughly reflects the organisation’s future outlook, current position and past accomplishments (or failures). Planning, Budgeting, and Forecasting should be seamlessly integrated as a unified whole that serves as a signpost directing the organisation toward its short- and long-term goals. In order to achieve that, PB&F must be shifted from Finance-centric to Organisation-wide, incorporating all facets of the firm: Finance, Procurement, Operation, and Sales & Marketing, to name a few.
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