In: Accounting
Explain the concepts of forecasting, strategic planning, and budgeting. Indicate how they are related and the key differences, if any, between them. (3–4 paragraphs)
The main differences:
Strategic planning
Strategic planning has the purpose to define the direction and expectations of a company, which are based on the vision of the stakeholders. An activity plan is established for a timeline of three to five years: what are the main objectives and where does the company want to be within 3 to 5 years? Strategic planning is a process of continuous reflection.
Budgeting
The establishment of the budget happens in many cases on a yearly basis and is based on data from different sources and levels. The resources are being divided and the company defines how the general plan and the objectives can be achieved per period. The presentation of a budget is mostly financial (balance sheet, P&L, cash flow…).
Forecasting
When doing forecasting, various data is being used to predict the financial outcomes of the company for the coming months or years. The executives make use of realistic historical data to establish new projections, which are then integrated in the budget. Timing can be per year or per semester.
Budgeting, planning and forecasting (BP&F) is a three-step strategic planning process for determining and detailing an organization's long- and short-term financial goals. The process is usually managed by an organization's finance department under the chief financial officer's (CFO) guidance.
The three steps involved in BP&F include:
Proper BP&F strategy is beneficial to organizations by producing competitive advantages such as more accurate financial reporting and analytics, higher overall revenue growth and increased predictive value.
BP&F best practices
Since effective BP&F processes bring organizations a variety of benefits, best practices should be implemented, including:
Key Differences
A budget is an outline of the direction management wants to take the company. A financial forecast is a report illustrating whether the company is reaching its budget goals and where the company is heading in the future.
Budgeting can sometimes contain goals that may not be attainable due to changing market conditions. If a company uses budgeting to make decisions, the budget should be flexible and updated more frequently than one fiscal year so there is a relationship to the prevailing market.
Budgeting and financial forecasting should work in tandem with each other. For example, both short-term and long-term financial forecasts could be used to help create and update a company's budget.