Finance What Is Planning and Budgeting? A Simple Guide to Budgeting, Planning, and Forecasting Read Time: 11 minutes What is planning and budgeting, and how does it differ from forecasting? In finance, these terms are often grouped together, yet each plays a distinct role in helping organizations allocate resources, set strategic goals, and track performance over time. Executives and those in decision-making positions can prevent potential crises and bypass many of the unknowns with budgeting, forecasting and meticulous planning for the company’s financial future. There are various techniques and systems for FP&A, all of which are uniquely used to help businesses achieve their desired outcomes. Certain methods of which to be particularly aware are short-term forecasting and longer-term budgeting. These involve analyzing everything from cash flow to department performance and require a proactive approach to financial management. Having a comprehensive budgeting, planning, and forecasting system in place is a surefire way to help businesses reap the benefits of their hard work. How that happens will be uncovered below. What is Financial Planning? Effective Financial Planning and Budgeting allow leadership teams to align short-term targets with long-term strategic goals. Financial planning is the process of using FP&A to direct business operations: for example, to plan for additional sales, new product rollouts, or other projects. FP&A allows businesses to manage their cash flows by creating ‘cash on hand’ or a cash ‘cushion’ to help in times of uncertainty, influx, and volatility. FP&A can also be a viable tool for driving both short-term and long-term goals and can be vital for contributing towards the transparency of a business planning model. The benefits of FP&A are plentiful. From helping businesses prepare for anticipated shortfalls to mitigating risk, the ways in which having a solid plan in place simplycannot be overloooked. Certain business models are also designed with a long-term strategy in mind. Scaling a business and preparing for growth is essential, especially in competitive sectors and industries. . In addition, allocation planning ensures that projects will have the resources they need to succeed. Last, but not least, financial planning helps businesses measure their own progress. The longer-term analysis shows to what extent a business is profitable. All major decisions really hinge on transparent long-term FP&A. Understanding Budgeting and Forecasting The budget is a detailed representation of a business’s finances and includes: Financial positions Cash flow Department allocations Sales numbers Product costs Future objectives Most businesses have annual budgets that they update on a yearly basis, but this may vary based on the needs of the business and changes within the industry. Reallocation of funds may be necessary based on economic trends and market changes. Most often, however, managers take note of the successes and failures within a given budget throughout a fiscal year and use that information as part of their future planning for the next fiscal year. Professionals also use something called ‘budget to actual’ comparisons, which are contrasts between what was projected in a budget, and what has been spent or received. This will be covered in greater detail later on. One of the primary benefits of early budgeting as a means of FP&A is the opportunity for management to remedy or modify potential shortcomings before the budget is set in stone and goes into effect. This could help bypass serious FP&A mistakes and may be instrumental in both short and long-term savings. Since the budget reveals how the business profited from each department and team’s work, it can trigger changes in performance-based compensation. Budget numbers can provide support for raises or bonuses when the profit can be tied to performance. Forecasting A forecast is a shorter-term form of a financial analysis that is typically less detailed than a budget. Similar to a budget, the forecast will show revenues and expenses. However, it may not include financial positions or static allocations and will often omit some of the line items seen in a more detailed budget. Unlike a budget which is typically updated on an annual basis, forecasts tend to be updated more frequently — typically (monthly or quarterly). A forecast from a dedicated FP&A tool may drive changes in areas including: Staffing (increase or decrease in staffing needs) Inventory levels and inventory management Production planning and scheduling Departmental activity New hiring processes Contracts Forecasts differ from budgets in that forecasts do not typically have variance analysis. Instead, a forecast will be used as an input into the budget itself and may provide some of the data for ‘budget to actual’ comparisons. With that in mind, forecasting doesn’t typically change performance-based compensation. While professionals might use a budget to justify things like raises or bonuses, they’re not likely to use forecasts this way, partly because the forecast is a short-term and less official set of estimations. Key Differences Between Planning, Budgeting, and Forecasting In the Planning and Budgeting process, the budget serves as a financial expression of the plan—ensuring that resources are allocated to support strategic initiatives and operational needs. Planning sets long-term strategic goals Budgeting allocates resources based on the plan Forecasting adjusts projections using real-time data A Deeper Dive into ‘Budget to Actual’ Budget to actual variance analysis goes by several terms, the most common of which are ‘budget versus actual’ and ‘budget to actual.’ Regardless of what they are called, the purpose of conducting these comparisons is so professionals can gain insight into why the actual results generated from FP&A tools may be different from what was initially forecasted. For example, a poor product rollout could lead to a discrepancy in budget to actual, as could competitor activity, market changes, or even natural disasters that occur on national or global levels. In other cases, the variance might have to do with unrealistic expectations or goals that were set without much transparent input. The most common factors that are evaluated In variance analysis include: Changes in market conditions Competitive positioning How projects were conceived and executed All of these details will factor into the variance analysis, which can have a significant impact on year-to-year budgeting. What Are the Benefits of Sound Planning, Budgeting and Forecasting? The best way to set a business up for long-term success is with sound FP&A. While this may sound like common sense, the fact of the matter is that the perceived complexities of planning, budgeting, and forecasting often deter managers from being as comprehensive and thorough as is necessary. Failure to engage in these practices may prevent managers from understanding where to allocate funds, especially if an enterprise is of complex proportions. Having a holistic FP&A platform like Kepion can help guide these decisions. Similarly, budgeting and forecast planning helps identify the return on investment (ROI) which is going to influence decision-makers in a big way. Planners can use budgets and forecasts from FP&A tools to visualize the cash flow that happens within the company. They may be able to spot how market trends impact their sales and profits. For example, business leaders can assess the information to see how well a new product did in a particular sales context (with competition, in a certain market cycle, etc.) The numbers can also support initiatives like action plans, or proactive remediation of problems that could impact the bottom line. If a business leader puts together a task force to address some financial problem, they will often operate based on the budget and forecast data that they are able to review. When used as a financial tool, initial FP&A planning can be pivotal for generating measurable data for future forecasting. Employees, investors, and stakeholders trust informed business decisions based on quantifiable metrics. It goes without saying that intuition. is not enough when it comes to directing business finances. A data-driven approach will almost always provide a superior outcome. At the very least, it will show businesses why their actions either were or were not successful so they can use this information to make decisions moving forward. Common Challenges Companies Face in Financial Planning, Budgeting and Forecasting One of the common challenges that companies face in planning budgeting and forecasting is around collaboration. Stakeholders must always ask if they have the right kind of buy-in. They have to make sure that people from different departments and levels of management have looked at their numbers, seen the impacts that they are presenting, and agree on a plan of action. Time is another challenge that companies often come up against. Many understand the importance of planning, budgeting, and forecasting but find it difficult to set aside the time required to do it correctly. These processes are labor intensive; businesses that are already operating with a lean staff may struggle to find sufficent openings in everyone’s cross-department schedules. Then there is the complexity factor. Business managers sometimes talk about the ‘black box’ problem which is an issue with transparency – when people don’t know how the inputs were created, or how they flow into a budget, the outcomes are less clear. It may be hard to understand what the budget and other elements of planning really mean in the grand scheme. Then there’s the element of accuracy, which brings business leaders back to doing the variance analysis. In the same vein, executives also have to be consistent with FP&A. It’s not enough to set a plan in place once and forget it in come Q2, 3, and 4. The consistent effort must truly be consistent for actual change to take effect. All of that effort has to be there all of the time. Understanding Financial Forecasting Best Practices So how do you build a good financial forecast? Some support details provide more guidance on how to develop specific approaches that will drive insights, ones that are actionable for business. First, begin with an endgame. Stay focused on how short-term information will impact long-term planning. It’s also necessary to get multiple views from different people at various levels of the business, or even in different lines of business. This relates to the coordination and collaboration goals aspect mentioned above. When conceptualizing budgeting, planning, and forecasting as a whole entity, it is important to plan for both worst case and best case scenarios. In fact, many businesses use FP&A tools to undertake scenario planning for this purpose. Experts also recommend building financial forecasts from both the top down and from the bottom up. This means actively listening to front line employees and encouraging them to voice their concerns.. Executives can create their own analysis, but they should also take into account information from those who are more directly involved in operations. Another best practice is not to assume, as improper assumptions can skew numbers. The more detailed a plan or forecast is, the better. Financial forecasts should also be adaptive. Rigid forecasting is not as useful in real life where volatility is always involved. How to Use Financial Forecasts to Prepare a Budget Here is how many companies use financial forecasting as input for budgets. As mentioned, fiancial forecasting is an input. The first step is to divide a budget into chronological parts. It can then be further broken down into KPIs (key performance indicators) and other metrics to show outcomes. This involves going back to the variance analysis and applying the inputs to the budget in question. How Can Analytics Improve Planning, Budgeting and Forecasting Processes? In all of this financial planning, hard data is a major asset. That hard data can come from people, but it can also come from cutting-edge technologies like FP&A tools that use AI and machine learning to bring insights. Modern budgeting and FP&A software offers a lot of this functionality. It can automate certain processes to produce forecasts and budgets while saving companies time and resources. useful forecasts and budgets. Kepion’s FP&A software solutions help businesses enhance their budgeting, forecasting and planning. These comprehensive tools support sales and finance operations, and keep business leaders clued in to how the company is doing at any given time. Get Kepion’s help with modern business intelligence applied to your firm’s finances.