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Planning, Budgeting and Forecasting - PB&F overview

Planning, Budgeting, Forecasting. We hear the 3 terms being thrown around a lot- oftentimes interchangeably. A company’s plan, budget, and forecast are usually talked about all together, whether it be in the boardroom, in a company goal-setting sheet, or in general talk about FP&A.

While all of these terms go together in a finance department setting, in reality they all hold very different functions and unique purposes.

Financial Planning

A financial plan is an overview of the financial direction and vision of the organization. While a financial plan obviously pertains to the finance aspect of the company, it still plays an important role within the context of a broader business plan.

The plan answers how the business will stack up in terms of operational and financial objectives farther down the line- whether it be quarterly, yearly, or in 5 years from now. Finance leaders and executives build teams and make decisions based on the financial data and the goals that result from it.

While the terms “budget” and “forecast” can be part of the plan, especially during periods of intensive budgeting and forecasting, the financial plan is the broader version of overall goals and objectives which the organization runs on.

Financial Planning in action

A financial plan is almost always long term (even if there are short term aspects to it, a financial plan needs to have a long term plan as well). Therefore it allows for more flexibility and creativity. In addition, in a financial plan, the means are less important than the end- after all the goal is the goal and even if there are bumps in the road, getting there is the most important thing.

However, this also comes with its challenges. A plan is heavily reliant on someone’s hopes and dreams and the combination of real data and subjective analysis makes it impossible for it to be perfectly accurate. A plan is also static, meaning that changing it often is not good for the health of the company.

An example of a financial plan is creating a long term goal or mission statement (let’s say 5 years) and then working out the details. Calculating profit and loss, revenue, market trajectories, and cash flow statements are some of the more detailed analysis to create on the way to the goal. Oftentimes after calculating the details, the mission statement will be adjusted to better reflect reality.


The budget is an essential part of the financial plan as it determines how much money will be spent in the given month, quarter, or year. Broken down even more, the budget’s goal is to determine what resources to allocate to each part of the company.

But the budget can’t be completed without the other two essential components- the plan and the forecast- as the budget is determined based on cash position, including expected revenue and expenses.

While budgets are usually created annually, the traditional untouchable, fixed budget is being challenged. More and more organizations are implementing flexibility in their budgets which can help them achieve their yearly goals. This is developing now because outside influences are changing much quicker than usual.

Budgeting in action

A good budget shows clear guidance on how a company should be spending its resources, not just by providing a dollar amount to the obvious things such as salaries, marketing campaigns, and taxes, but also providing a line item for any expense imaginable. In addition to being the “rulebook for spending”, budgets also create accountability for each department as over or under spending will stick out after a simple review. A budget aligns expectation with reality when it comes to revenue and expenses.

However, budgets can encourage bad habits and inefficiency, especially if they are too rigid. Budgets are usually created yearly, meaning that a lot can change over the course of a full year, but a budget sometimes constraints necessary spending. For example, if a marketing campaign is going particularly well but the budget is approaching its limit, in this case rigidity holds the company back, as continuing with the campaign is beneficial to the organization.

Creating a well thought out and in depth budget with room for flexibility under the right circumstances is crucial for healthy finances. In addition, fostering communication throughout the different departments will greatly help with budgeting scenarios such as those that need extra financing. The most important players are the financial analysts who need to calculate the variances between the two figures in order to evaluate the efficacy of the budget and the fiscal health of the organization.


A forecast is an estimate of what will happen in the future, and what will be achieved. Unlike budgeting which is traditionally static and updated once a year, forecasts are meant to be updated regularly. However the speed and frequency of forecasting is also changing thanks to market volatility and outside influences, and rolling forecasts and monthly updates are more common than ever before.

When forecasts are created, financial teams examine possible outcomes based on drivers and assumptions. This result gives executives a glimpse into the future so that they can determine whether or not adjustments need to be made to the budgeting or planning aspects.

The combination of data and human assumptions make it unique, and even among forecasting there are many ways to go about it such as by scenario analysis or sensitivity analysis just to name a few.

Forecasting in action

A forecast is usually the most flexible of the three, being that it needs to be updated regularly as things develop. There are dozens of different types and methods of forecasting- anything from qualitative and quantitative to static and rolling forecasts, all the way to surveys, executive opinions or any other of the unlimited factors and time periods that can be used as guidelines.

However, forecasting can take a lot of time. This is the biggest reason why companies don’t do the time consuming, but more accurate versions such as rolling forecasts, and instead forecast quarterly or biannualy.

More frequent updates and rolling forecasts are becoming more popular, thanks to the fast pace of consumer preferences and supply changes. The biggest advantage of this is being able to make adjustments in real time which allows a business to adjust their operations in any way deemed necessary, including changing the budget or even the short term financial plan when needed.

Budgeting and Forecasting Best Practices

The key difference between a budget and a forecast is that a budget lays out the plan for what a business wants to achieve, while a forecast states its actual expectations for results, usually in a much more summarized format. In short, a budget is a plan for where a business wants to go, while a forecast is the indication of where it is actually going.

Being that the finance team leads the way in budgeting and forecasting, the best way to start to build them is by implementing an FP&A budgeting and forecasting solution. This will not only help finance teams create a clear plan that increases inter-department collaboration, but it will also help them combine the data and machine learning forecasting aspect with the individualized company goals.



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