I’ve written about Forecasting versus Budgeting before, but in the face of the apparent trend of forecasting becoming more and more popular and impactful, I wanted to examine its place in the task of planning. Is it true that forecasting is the most important process for corporate performance management today – why or why not? What is the difference between a business plan, a forecast, and a budget? When should you be planning for your business, forecasting, and/or budgeting? What does each entail? This article will zoom in on planning today for your organization’s success in the future.
Besides budgeting, forecasting also fits into the planning picture with a business plan. I know that people get budgeting and forecasting confused, so adding a business plan into the mix might blur the lines even more. A business plan is a written statement of your strategy for the future, detailing the path forward for your whole organization and how each department will contribute to that plan. Included in a business plan are market share changes and assumptions about the economy, the competition, costs, new and retired products, facilities, reductions and investments. A forecast is a rolling capture of how the organization is actually performing, so this planning exercise is updated frequently. A budget is traditionally crafted once a year also bringing in intel from actuals versus projected and assumptions for the next year. If it’s not already clear, let’s discuss how these three tasks build on each other.
First of all, let’s remember that planning is not an exact science. Sure, actual numbers, research, and a true familiarity with the market are all required for an impactful strategy. But planning is an exercise and generally should be updated regularly and/or as needed to reflect the realities of how your efforts are comparing to your goals. Because it can be such a long, repetitive set of processes, it’s important to get organized, building a smart, sustainable workflow and refine it over the years. Both a business plan and a forecast should be updated regularly – these two are tied to each other. And while a budget is usually only done once a year, it pulls from the reality of the business’s performance (the forecast) and the up-to-date business strategy (business plan). Let’s further differentiate the three.
A business plan acknowledges where your company currently is and where the leadership team wants it to be. It should drive all decision-making, so as assumptions evolve differently than expected, this document should reflect a strategy that accounts for those changes. Business plans are also used to communicate the direction of the organization to all employees. It does not have to include all of the details, especially if the assumptions are sensitive, like anticipated layoffs, but the general strategy should be communicated, so everyone can understand how they play a role in working toward specified goals. In that sense, a business plan is a foundation of sorts for your organization.
A forecast should be created in the same window of time as the business plan. If your business plan is for 3 years, your forecast should be the same length. Forecasts can be rolling or current month through the end of the year, updated with actual data every month to replace old budgets or estimates, and they are also reflecting any changes in the business plan. Of course, the record-keeping of a forecast also influences the business plan, so they’re mutually impactful on each other. At this point in the evolution of business culture, in terms of how much companies rely on all kinds of data – and to be able to track on a monthly basis where the company is heading and how they’re getting to their goals, it seems like forecasting is logically the most important piece of your planning pie. That said, don’t anticipate business plans or budgets to go anywhere any time soon. Both benefit from the information captured in forecasting, and they also provide a point from where forecasting starts – and returns to, as actuals unfold.
A budget is a plan that is driven by taking a micro analysis approach, whereas a forecast is usually completed on a macro level, which for many means at the General Ledger account level. A budget typically breaks down the year plan from the company to the customer, product, and employee level. While budgets capture actuals as well, they have their own column next to the projected numbers. Your budget should be in line with the year as it is dictated in the business plan and the forecast, but is limited to the coming year. In other words, all three of these processes are linked and changes should be consistently made across the board. But where do these things occur on an organization’s calendar?
Your planning cycle will be specific to your organization, but planning can start in February. A business plan can be prepared in that first quarter, while the second half of the year is budgeting-dominant. Typically, a budgeting process wraps up in November or December to prepare for the next calendar year, but can start in July. Meanwhile, once you establish your forecasting process, you’re updating monthly and reviewing perhaps yearly to look ahead, given actuals and assumptions. Once you understand the difference between the three in theory and in practice, particularly for your organization’s needs, you’ll be able to establish a cycle that serves your planning objectives the best.
I’ve already weighed in on the title question, but depending on your resources and your organization’s specific objectives, decision makers will implement planning processes as needed. Each task can be covered in more depth if you are interested in learning more. Solver offers a planning module stand-alone and as part of the comprehensive suite of BI modules and would be happy to answer questions and generally review BI360’s easy-to-use budgeting and forecasting solution for collaborative, streamlined decision-making capabilities.