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What Is the Difference Between Budgeting, Planning and Forecasting?

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What Is the Difference Between Budgeting, Planning and Forecasting?

We are often asked the question about the difference between Budgeting, Planning and Forecasting (“BP&F”) and how they fit together.

This article takes a few moments to consider their inter-relationship and the capabilities required to deliver them:

Planning

A strategic prediction of business performance at a summary level e.g. 3 to 5 year strategic plan. Usually, planning is a centralised process performed at a Group level based upon limited information provided by divisions / subsidiaries. It is aimed at making sure the company responds to changing market conditions and opportunities, balancing assets with opportunities.

Accordingly, the process can be fairly frequent and must be completed quickly.

Software functionality to look for:

  • ‘What-if scenario’ capability to assess sensitivity
  • Speed of creation and consolidation

Budgeting

A budget is planning devolved for ownership to individual areas of responsibility. As a result, many more people are involved and work at a much greater level of detail, often using driver-based calculations. Budgeting is a slower exercise, often taking weeks and performed once a year.

Depending upon the industry, the budget may be out-of-date as soon as it’s approved.

Software functionality to look for:

  • Multi-user collaboration
  • Workflow
  • Version control
  • Driver-based

Forecasting

This is essentially a fine-tuning of the budget based on on-going performance. If early goals slip, it will affect the chance of achieving later goals. Companies typically re-forecast on a monthly or quarterly basis. Whilst the granularity level of data required at Group level is often the same, the divisions / subsidiaries will often not forecast in the same level of detail as the budget. Because the forecast is often required in monthly reporting, the process needs to be completed quickly.

Software functionality to look for:

  • Multi-user collaboration
  • Workflow
  • Version control
  • Speed of creation and consolidation

Table 1 below summarises the key aspects of planning, budgeting and forecasting.

 

Centralised/

De-centralised

Group level detailLevel of detailFrequency Speed
BudgetCentralisedSummarySummaryOftenQuick
PlanningDe-centralisedAs required for Group reportingHigh levelAnnualSlow
Forecasting De-centralised As required for Group reportingLess detail than budgetMonthly/QuarterlyQuick

Table1. Key aspects of planning, budgeting and forecasting

Conclusion

Although planning, budgeting and forecasting are highly related and dependent upon one another, it is important to remember that each is a distinct process. Forecasting and budgeting are part of the planning process, although planning also includes the development of goals and business strategies. Budgeting is about how the overall plan will be executed month to month. Forecasting uses accumulated historical data to predict outcomes for future months and provides a realistic view.

In this way, both forecasting and budgeting work together to turn a business plan into a reality. Despite its challenges and issues, organisations cannot forego the budgeting cycle. There is too much value in the end result to run a business without a financial plan. Budgets are fundamental strategic tools for delegating responsibility and accountability, ensuring that managers clearly understand the quantifiable parameters used to judge their performance. In addition, for many organisations, the budget serves as foundation for periodic forecasts.

HAYNE can take the headaches out of BP&F with tools for analysis, modelling and collaboration:

  • With our enterprise planning and analysis solution, your company has dynamic control and visibility over the process
  • Plans from all corners of your organisation are linked together, so that budgeting and forecasts can be performed rapidly and with increased accuracy

More TIME, greater CONTROL and a higher level of CONFIDENCE in where you are heading creates more choices, and greater opportunity and keeps you ahead of your competitors.

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