Differences between strategic planning, budgeting, and forecasting

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What we’re going to talk about:

  • Planning, budgeting, and forecasting are the three crucial components of any comprehensive and efficient financial management plan.
  • A company’s plan sets its longer-term objectives, the budget outlines how the company will allocate its financial resources to execute the plan, and forecasting measures the short-term successes or failures along the budget’s trajectory.
  • Modern software streamlines each of these processes, while simultaneously increasing overall accuracy.

While most organisations apply planning, budgeting, and forecasting to form, analyse, and evaluate their business plans and performance, a surprising number still keep the processes separate or use outdated data collection methods, either of which can jeopardize accuracy and efficiency.

These days, there are several planning, budgeting, and forecasting tools on the market, designed to address such issues and enable a cohesive process. Before considering a new system, it’s crucial to understand the similarities and differences between the three, and the best ways to integrate them all in order to maximise efficiency.

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What is Planning, Budgeting, and Forecasting?

Planning, budgeting, and forecasting are three ways that businesses form a strategic plan for the future. Planning consists of setting long-term – typically three- to five-year – goals, with milestones to mark achievement of said goals. By contrast, budgeting is the process of allocating business funds for a shorter time period, usually a fiscal year. Finally, financial forecasting is more of a rolling, regular concern that provides more current, up-to-date insight, and helps analyse the current situation in relation to the overriding plan and budget.

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Planning

Financial management strategising typically begins with planning, which requires shareholders and executives to clearly state where they want the business to be in three, five, or ten years. Of course, all companies want to increase revenue, but financial planning needs to be more specific. Goals can look at different metrics, such as increasing revenue by 2% each year for five years, for example, or increasing lead conversions by 0.5% each year for three years.

Once these goals are set, it’s time to craft a blueprint of different projects, programmes, or campaigns to achieve the desired outcome. While outlining a plan, businesses may choose to include one or more contingency plans to allow for any sudden or unexpected market or industry changes. The financial team should view the plan as a working document that they can amend. While the goals may not necessarily change, they may have to alter the method of achieving them.

Budgeting

Budgeting is the process of allocating financial resources to the various projects, programmes, and campaigns identified in the planning stage throughout a fiscal year. Most businesses construct their budget by analysing the previous year’s actual expenses and revenue and building their budget based on those numbers. Additionally, the finance team will account for market and industry trends to determine what needs extra or less support. In some cases, executives building the budget will review the long-term plan and draft an annual budget that works toward achieving those goals.

Forecasting

The forecasting process consists of running multiple ‘what-if’ scenarios to help inform future budgeting and planning decisions. Financial forecasters translate recent performance data and subjected analysis into understandable graphs or other documents that enable executives to adjust their strategies. Consistent forecasting allows the financial team to make rapid alterations to their budget or short-term plan when necessary. Although forecasting is no guarantee of the future, modern technology has made it more accurate and keeps businesses who use it one step ahead of their competitors.

What Is the Relationship Between Planning, Budgeting, and Forecasting?

These three processes need to address and serve each other, but from different time perspectives. Integrating them offers a smarter, more efficient way to work toward company goals. However, it’s difficult to form a cohesive strategic financial plan with traditional tools and methods, such as budgeting through Excel. Using software specifically designed to streamline planning, budgeting, and forecasting saves executives time and effort while increasing accuracy.

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Most budgets are comprised of historical data with numbers manually entered into a spreadsheet, often with separate teams working on the same document, leaving plenty of room for human error and sizable discrepancies. Strategic financial planning software solves these issues by increasing collaboration in a company and allowing for automatic updates with real-time data. The software can even make company-wide alterations to the plan or budget when needed, gathering the actual performance information required for precise forecasting, and identifying significant changes in the market.

Although plenty of businesses remain comfortable with Excel, modern strategic planning software offers so much more, including a more user-friendly experience that can quickly scale with the company as well as help the company react better to changing market conditions. Strategic planning software can help executives craft a budget confidently, helping them to plan and predict cash flow better and more effectively. Building a stronger relationship between planning, budgeting, and forecasting strategies helps businesses prepare for the best while being ready to handle the worst.

The Budgeting and Forecasting Process

Finance teams generally complete the budget once a year and, because of the sheer pace of the corporate world, can carry out their financial forecasts as frequently as every month to analyse and keep abreast of any necessary changes. It’s also a best practice to run forecasts both while crafting the annual budget and while it’s in effect. Budgeting and forecasting work interactively: forecasting influences the amounts allocated in the budget, and the team can imagine the trajectory of a proposed budget through forecasting.

Using separate applications for budgeting and forecasting can result in significant and potentially devastating discrepancies and efficiency issues. Integrating these processes within one software allows for more accurate plans and projections, no matter the style of budget adopted or forecasts run.

Strategic Budgeting and Forecasting Examples

Although planning and budgeting ultimately work toward the same end goals, many corporations fail to integrate these processes.

Strategic planning is the blending of planning, budgeting, and forecasting to make informed decisions and set realistic goals for the company’s growth. Although they serve different functions, instead of treating planning and budgeting as separate entities, strategic planning combines the two to streamline long- and short-term strategizing and allows companies to quickly adapt their plan to the volatile nature of the market.

Streamline the Planning, Budgeting, and Forecasting Processes

Excel workbooks remain valuable, but restrictive. Doing everything possible to increase accuracy, efficiency, and adaptability makes it much more likely to reach long-term goals. Taking advantage of specialised software for planning, budgeting, and forecasting allows you to get real-time data and insight within seconds so you can look to the future. Upgrading your system to state-of-the-art software will simplify the process and improve the quality of your data.