Savvy business executives use a combination of planning, forecasting and budgeting to plan where their company is headed in the future and how to get there. Planning, budgeting and forecasting is a three -step process for detailing and determining an organisation’s short and long term goals. Companies make use of this three-step process to map out the present and envision the future. Though all three processes are essential in running a business, they each play specific distinct roles.
- Planning – Planning is usually the first step in setting up a business and continues to be used as things progress. Planning outlines the company’s financial direction and expectations for the next three to five years. When businesses engage in planning, they look at what they want to accomplish and what it will take to get there. Figuring out how to stay successful involves knowing what has worked in the past and how the market is changing.
- Forecasting – Once you have an idea of how much income you will be generating through your business, you can start forecasting to determine what you might be able to achieve in the long-term. Forecasting uses historical data to predict financial outcomes or performance for future months or years. Businesses apply forecasting to determine how to allocate their budgets or plan for anticipated expenses for an upcoming period of time. Forecasting starts with certain assumptions based on the management’s experience, knowledge, and judgment. Forecasting tracks the anticipated performance to enable businesses make timely decisions to address shortfalls against set targets.
- Budgeting – A budget documents how the overall plan will be executed, specifying all cost and expenses. Once a company has firm goals in mind, it needs to look to its budget. Budgeting is both a short and long-term task in which a business determines how much money will be coming in and how to balance this with how much will be spent. If you want to get a feel of a company’s budget, check out its cash flow statement, where it keeps track of the cash coming in and going out, as well as the income statement, which is also known as the “profit and loss statement”. Many companies set their budgets at the beginning of the calendar or fiscal year while leaving room for adjustments as revenue increases or decreases.
Budgeting, planning and forecasting are all essential tools for running a business. It takes a robust plan to get a business off the ground and running. This plan will continue to serve the business throughout its life span but may be updated when necessary. Forecasting, with all its risks and uncertainties plays a critical role in clarifying things in advance to enable businesses take appropriate steps. Budgeting enables resource allocation to be aligned with strategic goals and targets set by a company. Top performing companies must effectively integrate planning, budgeting and forecasting as a key component of their performance management framework.