business plan vs forecast

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Updated: September 29, 2023 |

What’s the difference between a plan, a budget, and a forecast?

Jake Ballinger is an experienced SEO and content manager with deep expertise in FP&A and finance topics. He speaks 9 languages and lives in NYC.

“Remind me, what’s the difference between the plan and the forecast?” is something we often hear from executives looking for clarity.

While a company’s plan, budget, and financial forecast are often discussed in the boardroom, these terms’ functions are not always precise.

Finance leaders commonly use the three terms in conjunction with one another, allowing each model to inform the others. 

So...are they interchangeable? No.

In fact, financial forecasting, budgeting , and planning each serve a unique purpose. A plan serves as the foundation, a budget guides how to allocate cash, and a forecast projects the financial future of the business.

CFOs understand that each is a standalone piece of the company’s financial puzzle.

Jake Ballinger

FP&A Writer, Cube Software

Financial planning: explained

Budgeting: explained, forecasting: explained.

Plan vs. budget vs. forecast

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Generally, a financial “plan” aims to define the financial direction and vision of the organization within the context of a broader business plan.

Leaders ask themselves how the business will stack up in the next 1, 5, or even 10 years. The “plan” answers that question by outlining the company’s operational and financial objectives. Executives build out teams and infrastructure based on this plan and the defined goals. 

Colloquially, the “plan” is sometimes used interchangeably with the most recent budget or forecast, and can be broadly considered the budget or forecast that is the most likely “version of truth”.

Because of the long-term nature of a financial plan, it allows for more flexibility and creativity. In the case of a financial plan (versus a budget, for example), the means are less important than the end. Ultimately, a good financial plan provides a top-down operational framework to explore various scenarios.

Because an organization's future is undefined, financial planning is a perpetual process. Despite this, a plan is more static—more of a roadmap than a document updated daily. The plan relies on historical performance data and subjective financial analysis, so it can never be fully accurate. 

Businesses, but most commonly, the Finance team, compile a budget to determine how the company will spend its capital during the next period—a month or quarter, but typically a fiscal year.

The budget’s primary goal is determining what resources to allocate to each part of the company, from salaries to office supplies. The focus of a budget revolves around cash position, including expected revenues and expenses, to create specific financial goals for the foreseeable future.

Most businesses create a budget annually and implement it from the start of the fiscal year.  The budget is also commonly considered “unmovable” and is used to gauge performance of actuals or forecast data versus the planned budget.

A thorough budget offers clear guidance on how a company should be spending its resources by providing a line item for any expense imaginable. Budgets also create accountability for departmental spending because overages are apparent and gaps in appropriate funding become clear as the year unrolls.

Teams should review the budget regularly and compare it with actuals, making each department responsible for any variances that occur.

A budget aligns expectation with reality when it comes to revenue and expenses.

Budgeting can be a difficult process because of the kind of involvement it takes across departments, including meetings and negotiations with department leaders to determine the amount of cash they will need to accomplish business goals over the budget. Since budgets are generally made to last an entire year, a budget might constrain necessary spending (or saving) if any unexpected situations in cash flow arise.

Essentially, expense allowances are built not to exceed budget limits, while income projections are the minimum needed to balance the budget. Financial analysts need to calculate the variances between the two figures to evaluate the budget's efficacy and the organization's fiscal health.

A forecast is a financial snapshot of the future as it is best understood today.  When creating a forecast , teams must examine possible financial outcomes based on the most up-to-date drivers and assumptions . The result is a view of how the business is trending so that the leaders can determine whether or not adjustments should be made to the existing budgets or plans.  

For example, the budget might assume that the business will hit a $10M revenue target, but the forecast shows that the business is on target to only achieve $8M.  Given the difference between the forecast and the budget, the business might adjust the variable costs associated with lower revenue, while simultaneously adjusting the expense plan in order to hit cash targets.

A company’s financial forecast is updated regularly, such as monthly or quarterly. The forecast’s undefined nature allows it to be used for both short- and long-term projections and adapt to recent performance data. In this way, executives can make changes in real-time, adjusting their operations, such as production, marketing approach, and staffing. 

Forecasting can be a time-consuming process that not all businesses are able to stay on top of regularly.  Because of this, many businesses update their forecast data periodically, such as quarterly or biannually.  It’s considered a best practice to build a rolling (ongoing) forecast to make these adjustments in real-time.

Conclusion: Plan vs. budget vs. forecast

All three terms reflect expectations and estimates of financial objectives. Financial planning lays the foundation for budgeting, suggesting that a financial plan must precede the budget so that company leaders have an idea of what they are budgeting for. Meanwhile, a forecast projects how far over or under expectations a company may be.

A financial plan is a strategic, long-term tool, while a budget is tactical and short-term. A financial forecast is an updated reflection of the future. In a way, the forecast bridges the gap between the business plan and the budget. 

The most financially disciplined businesses leverage all three tools in planning and operations. Financial modeling software like Cube can help companies build multiple plan scenario types, including budgets, forecasts, and even what-ifs, in a way that allows leaders to visualize data, analyze past performance, and calculate how decisions may affect future goals.

Want to see how Cube can accelerate your financial planning? Get a demo today. 

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Budget vs. Forecast: Key Differences You Need to Know

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For businesses, it’s critical to have an accurate budget and an accurate forecast. This is especially true of small businesses where a single accounting oversight can leave a business owner strapped for cash or, worse, having to let an employee go.

Are you scratching your head right now? If you have always thought of your business budget and your business forecast as one and the same, you’re not alone. Forecasts and budgets are two different, yet equally important, financial animals. Here's what you need to know.

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What's the difference between a budget vs. a forecast?

The difference between a budget and a forecast is that a business's budget is a plan that its management sets to determine how they want to grow the company. A budget doesn't predict what will happen but sets a plan for what the business owner wants to happen. A forecast, on the other hand, estimates the future financial progress and outcomes of the business. Management teams use historical data and growth rates to forecast what the business's financials will look like in the future.

Business budgets 101

A budget sums up a business's goals for the upcoming year. Think of it as a plan of action over a certain amount of time. In a budget, costs and revenue are input into a spreadsheet.

When it comes to creating a budget, remember that a budget should:

Consider the expected demand for products and services.

Take a company’s highest priorities and arrange the appropriate resources to cover those priorities.

Show potential problems early enough that a company can take action.

Have a baseline to show against the actual results.

Different types of budgets include:

Sales budget.

Production budget.

Marketing budget.

Project budget.

Why should you create a budget?

A budget is a key management tool for small business owners. When you think of budgets vs. forecasts, think of a budget as a plan: It helps you map out where you want to be in the next one, two, or five years.

You set your business budget with the help of your forecast (after all, you don't want to budget for financial growth that won't really happen based on historical performance), execute on your plan and compare your actual progress against what you planned for in your business budget.

Setting and sticking to a budget is a great way to make sure that your team is always investing in the things you've decided will make you successful and make real progress to that goal.

Forecasts 101

Forecasts are more abstract in the sense that they are working from historical data to project or predict what might happen in the future. They also look at current and future possibilities as a way of safeguarding a business.

Like we mentioned above, a budget uses these predictions in order to fiscally prepare should they happen. Following a budget is an obligation for a small business, while they are not obligated to follow a forecast. People divide forecasting into two different types:

Judgment forecasting —Judgment forecasting utilizes only your intuition and experience to surmise what might happen in the near future. It is best used when there is no historical data to work from like for new product launches.

Quantitative forecasting —This type of forecasting uses large amounts of data to derive the most likely situations that a small business might face. It relies on repeated patterns in order to come to its conclusions.

Using both judgment forecasting and quantitative forecasting allows a small business to get the most accurate take on what the fiscal year might bring.

We also recommended that you use at least two, ideally three forecasts. These different forecasts should account for the best possible growth, the worst possible growth and "okay" growth. Looking at this can help you understand just how fast you're growing.

Why should you use a forecast?

As we mentioned above, you don't want to waste time budgeting for financial and business growth that will never really happen. A forecast helps you ground your predictions in reality by taking past financial growth and projecting that growth in the future.

A forecast also helps you react to change in a way that a budget does not. For instance, if your business typically has a slow month, a forecast will show you that in the numbers. Or, if you have forecasted your growth based on retaining a large client and that client for some reason is no longer using your services, you can quickly adjust your forecast to compensate for the loss.

This article originally appeared on Fundera, a subsidiary of NerdWallet.

Jennifer Dunn also contributed to this article.

On a similar note...

Planning, budgeting and forecasting is typically a three-step process for determining and mapping out an organization’s short- and long-term financial goals.

• Planning  provides a framework for a business’ financial objectives — typically for the next three to five years.
• Budgeting  details how the plan will be carried out month to month and covers items such as revenue, expenses, potential cash flow and debt reduction. Traditionally, a company will designate a fiscal year and create a budget for the year. It may adjust the budget depending on actual revenues or compare actual financial statements to determine how close they are to meeting or exceeding the budget.
• Forecasting  takes historical data and current market conditions and then makes predictions as to how much revenue an organization can expect to bring in over the next few months or years. Forecasts are usually adjusted as new information becomes available. 

The process is usually managed by a chief financial officer (CFO) and the finance department. However, the definition can be expanded to include all areas of organizational planning including: financial planning and analysis , supply chain planning , sales planning , workforce planning and marketing planning .

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Basic business accounting practices date as far back as the 1400s, when Venetian investors kept track of their Asian trade expeditions using double-entry bookkeeping, income statements and balance sheets. The word “budget” is from the old French word “bougette,” meaning “small purse.” The British government began to use the phrase “open the budget” in the mid-1700s, when the chancellor presented the annual financial statements. Businesses began to regularly use the term “budget” for their finances by the late 1800s.

Modern business forecasting began in response to the economic devastation of the Great Depression of the 1930s. New types of statistics and statistical analyses were developed that could help business better predict the future. Consulting firms emerged to help companies use these new prediction tools.

Accounting and forecasting were difficult in the early 20th century because they depended on laborious hand-written equations, ledgers and spreadsheets. The emergence of mainframe computers in the 1960s and personal computers in the 1980s sped up the process. Software applications such as Microsoft Excel became widely popular for financial reporting. However, Excel programs and spreadsheets were prone to input errors and cumbersome when various departments or individuals needed to collaborate on a report.

By the start of the 2000s, companies gained access to ever-growing operational data sources, as well as information outside corporate transaction systems — such as weather, social sentiment and econometric data. The vast amounts of available data for forecasting created a need for more sophisticated software tools to process it.

Numerous planning software packages emerged to handle this data complexity, making planning, budgeting and forecasting faster and easier — both for processing and collaboration. With predictive insights drawn automatically from data, companies could identify evolving trends and guide decision making with foresight, not just hindsight.

Today, cloud-based systems are becoming the standard, providing more flexibility, security and cost savings — helping organizations generate accurate predictions and budgets with fewer errors.

But despite these advancements, businesses are still quite dependent on traditional spreadsheets. 1   Seventy percent of businesses say they rely heavily on spreadsheet reporting, with only 16 percent using on-premise specialist software — and only ten percent using cloud software for planning.

Many businesses still base their strategy on annual plans and budgets, which is a management technique developed over a century ago. But in today’s more competitive environment, organizations are realizing that plans, budgets and forecasts need to reflect current reality — not the reality of two, three or more quarters ago. Continuous planning and rolling forecasts are becoming widely used methodologies to update plans, budgets and forecasts frequently throughout the year, on a quarterly or even monthly basis. These approaches help managers spot trends before their competitors — helping them make better informed, more agile decisions about pricing, product mix, capital allocations and even staffing levels.

Creating and implementing a sound planning, budgeting and forecasting process helps organizations establish more accurate financial report and analytics — potentially leading to more accurate forecasting and ultimately revenue growth. Its importance is even more relevant in today’s business environment where disruptive competitors are entering even the most tradition-bound industries.

When companies embrace data and analytics in conjunction with well-established planning and forecasting best practices, they enhance strategic decision making and can be rewarded with more accurate plans and more timely forecasts. Overall, these tools and practices can save time, reduce errors, promote collaboration and foster a more disciplined management culture that delivers a true competitive advantage.

Specifically, companies are able to:

• Quickly update plans and forecasts in response to new threats and opportunities, identifying risk areas early enough to rectify issues before they are serious.
• Identify and analyze the impact of changes as they occur.
• Strengthen the links between operational and financial plans.
• Better plan and predict cash flows.
• Improve communication and collaboration among plan contributors.
• Consistently deliver timely, reliable plans and forecasts, plus contingency plans, for a range of possible events.
• Analyze variances and deviations from plans and promptly take corrective action.
• Create a budget specifically for growth and having confidence in how much can be spent.
• More accurately manage sales pipelines while tracking performance against targets.
• Make more confident strategic decisions based on hard data, instead of hopes or guesswork.
• Provide evidence of an organization’s future trajectory to potential investors and lending institutions based on multiple data sources and sophisticated analysis.

Budgeting, planning and forecasting software can be purchased as an off-the-shelf solution or as part of a larger integrated corporate performance management (CPM) solution.

Advanced software solutions enable organizations to:

• Measure and monitor performance through interactive, self-service dashboards and visualizations.
• Examine root-causes with high-fidelity analysis of dimensionally rich data.
• Evaluate trends and make predictions automatically from internal or external data.
• Perform rapid what-if scenario modelling and create timely, reliable plans and forecasts.

Planning is easier and more effective when practitioners follow well-established best practices. Software solutions that support these practices can enhance the timeliness and reliability of information and increase participation by key people throughout the organization; especially those at the front lines.

Leading companies have moved to solutions that address the full planning cycle — data collection, modeling, analytics and reporting — on a common planning platform with lean infrastructure requirements. Such platforms can handle a diverse range of business functions, from budget-focused finance tasks to, for example, supply chain-focused planning for retail environments with thousands of SKUs (stock keeping units).

Companies like IBM offer holistic, integrated software solutions to streamline the planning, budgeting and forecasting process. The logic is that to adapt to today's quickly changing business conditions, an organization needs one solution that creates a single source of truth and visibility into all its data. These solutions can extend well beyond the financial aspects of the business, becoming a powerful forecasting engine across the enterprise. With these agile planning and exploratory analytics software solutions — whether in the cloud or on-premises — companies can perform planning, budgeting and forecasting with greater speed, agility and foresight.

Evaluating and selecting planning, budgeting and forecasting software is a complex task. It requires careful consideration of the software’s functionality, its value to the planning process and its ability to support planning best practices. There are also factors such as vendor reliability and support, user community connections and commitment to customer success once the sale is complete.

IBM Analytics  recently published a guide to help organizations evaluate planning, budgeting and forecasting software — identifying key qualities to look for:

• Adaptive . Can you rapidly change models and re-forecast frequently, based on input from business units? Can you update plans as often as necessary?
• Timely . Is your information always current because users contribute directly to a central planning database? Are your consolidations and rollups done automatically to easily meet deadlines?
• Integrated . Do your planning, analysis, workflow and reporting functions reside on one common platform, reducing the need to maintain “shadow” planning systems?
• Collaborative . Is your solution web-based? Does it enable participation anytime, from anywhere with a secure connection?
• Self-service . Are users able to access data and perform complex analysis without the assistance of IT? Are you able to use a familiar spreadsheet interface for faster user adoption and accelerate time to value?
• Enterprise-scale data capacity . Is your solution capable of handling very large data volumes without limiting cube size? Some solutions do not handle “data sparsity” well — forcing data to be split into multiple cubes for analysis, causing version control issues.
• Efficient . Are your managers able to spend less time managing data and more time managing the business?
• Relevant . Do you have the ability to customize views for different user roles, to help increase adoption and process ownership? Do you have formula capabilities that enable modeling of all relevant business drivers?
• Accurate . Do your plans contain errors because of broken links, stale data, improper rollups and missing components?

The key is not just evaluating product features and capabilities, but also evaluating how those features will be implemented by different users within the organization. It’s important to test any planning solution that will be used by a large variety of stakeholders such as finance, operations, HR and sales.

Discover how one of the largest operators of parking facilities in the Middle East used IBM Planning Analytics to deliver better automation and multidimensional analytical power along with cost advantages.

Learn how the real estate developer enhanced its core planning, forecasting and project management capabilities with IBM technology to drive even greater profitability.

Find out how the company used IBM planning analytics to provide monthly and weekly reporting for engineering, marketing, sales and operations.

IBM Planning Analytics provides a single solution to automate planning, budgeting and forecasting for your enterprise.

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1 The Future of Planning, Budgeting and Forecasting Global Survey, Workday and FSN, 2017  (link resides outside ibm.com)

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The Forecast and the Plan: What’s the Difference?

Plex DemandCaster

Imagine a new professional, walking into her first Sales and Operations Planning Meeting at the multinational corporation who hired her only a few weeks earlier. This is a big moment for the new employee.

The meeting might be awash with numbers, spreadsheets, graphs, and interactions between people that she doesn’t yet understand completely. Managers might talk a language that is rather unfamiliar. She understandably may feel somewhat overwhelmed.

The language of Supply Chain Management is important. Practitioners need to take special care to define terminology clearly, to avoid misunderstandings. As a relatively new business concept, SCM strives to promote a common lexicon that is universally recognized and accepted.

Frequently, for example, business people use the terms “forecast” and “plan” as if they are synonymous. But these two words carry very different meanings and the implications of confusing the two can be significant.

A forecast is a prediction of future events, using a means other than simply making a blind guess.

A plan, on the other hand, is an articulation of how a company intends to respond to a demand forecast. Ultimately, the plan integrates many other factors in addition to the forecast in order to set operational direction for the business.

There are many types of forecasts that are used in business. Companies assemble technological forecasts, economic forecasts, and demand forecasts. It is the demand forecast that is of greatest interest to an operations manager, and supporting the fulfillment of future demand is of critical importance to supply chain professionals. We use demand forecasts to help us plan capacity, human resources, and logistics strategies.

We understand that, because of the myriad variables at play, forecasts are rarely 100% accurate. In spite of the shortcomings, forecasting is an essential part of planning for the future. By taking the time to operationalize the forecast and develop a plan, we are forced to think through potential positive or negative scenarios. Over time, careful forecasting will lead to more efficient and realistic planning.

In contrast to forecasting, planning is the process whereby a business considers all strengths, weaknesses, opportunities, and threats, and provides direction to the company in its entirety. The plan metabolizes not only the forecast, but it also balances demand with the company’s ability to fulfill demand. These two sides of the scale are sometimes referred to as “priority” (demand) and capacity (supply). Further, the plan can articulate methods by which a business will try to influence the forecast, perhaps by increasing demand or shifting the timing of demand through marketing.

Companies that use a formalized Manufacturing Planning and Control (MPC) architecture will direct different levels of forecasts toward different levels within the planning hierarchy.

Highly aggregated forecasts of future demand and economic conditions will be directed toward the Strategic Planning activities near the top of the MPC hierarchy. Somewhat disaggregated forecasts at product category of  family levels will be of greatest interest to the Sales and Operations Planning functions that are undertaken by mid-level management. Very detailed item-level forecasts for finished goods will be used most commonly in the Master Production Scheduling (MPS) and Control activities. It is important that the SCM professional use forecasting techniques and approaches that match the intended use of the forecast.

Taking the demand forecast into consideration and combining it with other forces that come to bear on the company such as the labor market, economies of scale, and the potential for realizing manufacturing efficiencies, business leaders might choose between a level, chase or hybrid production strategy. Depending upon the production strategy used, the forecast and the operational plan can be at significant variance from each other, and this will be by design.

Operations managers are responsible to achieve planned production levels, and through this key performance metric, operations will support fulfillment of demand and will support marketing sales strategies. Financial plans will flow from the construction of sales and operational plans, resulting in the calculation of cash flow, inventory, and profitability projections.

Sales and Operations Planning ( S&OP ) activities provide a key link between the market (external to the business) and internal manufacturing processes. S&OP drives the Master Production Schedule (MPS), which is the time-phased statement of what quantities of finished goods are required, and precisely when those quantities are required. Manufacturing is held responsible to complete the MPS. This activity is frequently called “hitting the schedule.”

It is not unusual that, as the year progresses, new demand forecast information comes to light that puts sales potential at wider variance from the production plan than was originally foreseen. It is through a disciplined monthly S&OP process that such differences become reconciled. Appropriate adjustments to the plan are made in response.

 In summary, we have seen that the operations plan is not a forecast of demand. Rather, the demand forecast becomes metabolized in the business through Sales and Operations Planning. S&OP takes into consideration not only the demand forecast, but also constraints faced by the business, technological realities, marketing initiatives, and financial targets. Output from the S&OP process becomes a key input to the Master Production Schedule, achievement of which is a key focus of the manufacturing team. Production strategy works to decouple the forecast from the production plan, even as manufacturing execution supports the sales plan.

Contact us if you would like to learn how DemandCaster can help you reap the benefits of effective S&OP planning.

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What Is Business Forecasting? Definition, Methods, and Model

What Is Business Forecasting?

Business forecasting involves making informed guesses about certain business metrics, regardless of whether they reflect the specifics of a business, such as sales growth, or predictions for the economy as a whole. Financial and operational decisions are made based on economic conditions and how the future looks, albeit uncertain.

Key Takeaways:

• Forecasting is valuable to businesses so that they can make informed business decisions.
• Financial forecasts are fundamentally informed guesses, and there are risks involved in relying on past data and methods that cannot include certain variables.
• Forecasting approaches include qualitative models and quantitative models.

Understanding Business Forecasting

Companies use forecasting to help them develop business strategies. Past data is collected and analyzed so that patterns can be found. Today, big data and artificial intelligence has transformed business forecasting methods. There are several different methods by which a business forecast is made. All the methods fall into one of two overarching approaches: qualitative and quantitative .

While there might be large variations on a practical level when it comes to business forecasting, on a conceptual level, most forecasts follow the same process:

• A problem or data point is chosen. This can be something like "will people buy a high-end coffee maker?" or "what will our sales be in March next year?"
• Theoretical variables and an ideal data set are chosen. This is where the forecaster identifies the relevant variables that need to be considered and decides how to collect the data.
• Assumption time. To cut down the time and data needed to make a forecast, the forecaster makes some explicit assumptions to simplify the process.
• A model is chosen. The forecaster picks the model that fits the dataset, selected variables, and assumptions.
• Analysis. Using the model, the data is analyzed, and a forecast is made from the analysis.
• Verification. The forecast is compared to what actually happens to identify problems, tweak some variables, or, in the rare case of an accurate forecast, pat themselves on the back.

Once the analysis has been verified, it must be condensed into an appropriate format to easily convey the results to stakeholders or decision-makers. Data visualization and presentation skills are helpful here.

Types of Business Forecasting

There are two key types of models used in business forecasting—qualitative and quantitative models.

Qualitative Models

Qualitative models have typically been successful with short-term predictions, where the scope of the forecast was limited. Qualitative forecasts can be thought of as expert-driven, in that they depend on market mavens or the market as a whole to weigh in with an informed consensus.

Qualitative models can be useful in predicting the short-term success of companies, products, and services, but they have limitations due to their reliance on opinion over measurable data. Qualitative models include:

• Market research : Polling a large number of people on a specific product or service to predict how many people will buy or use it once launched.
• Delphi method : Asking field experts for general opinions and then compiling them into a forecast.

Quantitative Models

Quantitative models discount the expert factor and try to remove the human element from the analysis. These approaches are concerned solely with data and avoid the fickleness of the people underlying the numbers. These approaches also try to predict where variables such as sales, gross domestic product , housing prices, and so on, will be in the long term, measured in months or years. Quantitative models include:

• The indicator approach : The indicator approach depends on the relationship between certain indicators, for example, GDP and the unemployment rate remaining relatively unchanged over time. By following the relationships and then following leading indicators, you can estimate the performance of the lagging indicators by using the leading indicator data.
• Econometric modeling : This is a more mathematically rigorous version of the indicator approach. Instead of assuming that relationships stay the same, econometric modeling tests the internal consistency of datasets over time and the significance or strength of the relationship between datasets. Econometric modeling is applied to create custom indicators for a more targeted approach. However, econometric models are more often used in academic fields to evaluate economic policies.
• Time series methods : Time series use past data to predict future events. The difference between the time series methodologies lies in the fine details, for example, giving more recent data more weight or discounting certain outlier points. By tracking what happened in the past, the forecaster hopes to get at least a better than average view of the future. This is one of the most common types of business forecasting because it is inexpensive and no better or worse than other methods.

Criticism of Forecasting

Forecasting can be dangerous. Forecasts become a focus for companies and governments mentally limiting their range of actions by presenting the short to long-term future as pre-determined. Moreover, forecasts can easily break down due to random elements that cannot be incorporated into a model, or they can be just plain wrong from the start.

But business forecasting is vital for businesses because it allows them to plan production, financing, and other strategies. However, there are three problems with relying on forecasts:

• The data is always going to be old. Historical data is all we have to go on, and there is no guarantee that the conditions in the past will continue in the future.
• It is impossible to factor in unique or unexpected events, or externalities . Assumptions are dangerous, such as the assumption that banks were properly screening borrowers prior to the subprime meltdown .  Black swan events have become more common as our reliance on forecasts has grown.
• Forecasts cannot integrate their own impact. By having forecasts, accurate or inaccurate, the actions of businesses are influenced by a factor that cannot be included as a variable. This is a conceptual knot. In a worst-case scenario, management becomes a slave to historical data and trends rather than worrying about what the business is doing now.

Negatives aside, business forecasting is here to stay. Appropriately used, forecasting allows businesses to plan ahead for their needs, raising their chances of staying competitive in the markets. That's one function of business forecasting that all investors can appreciate.

Kesh, Someswar and Raja, M.K. "Development of a Qualitative Reasoning Model for Financial Forecasting."  Information Management & Computer Security, vol. 13, no. 2, 2005, pp. 167-179.

Infiniti Research. " Business Forecasting: The Challenges in Knowing the Unknown ."

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7 Financial Forecasting Methods to Predict Business Performance

• 21 Jun 2022

Much of accounting involves evaluating past performance. Financial results demonstrate business success to both shareholders and the public. Planning and preparing for the future, however, is just as important.

Shareholders must be reassured that a business has been, and will continue to be, successful. This requires financial forecasting.

Here's an overview of how to use pro forma statements to conduct financial forecasting, along with seven methods you can leverage to predict a business's future performance.

What Is Financial Forecasting?

Financial forecasting is predicting a company’s financial future by examining historical performance data, such as revenue, cash flow, expenses, or sales. This involves guesswork and assumptions, as many unforeseen factors can influence business performance.

Financial forecasting is important because it informs business decision-making regarding hiring, budgeting, predicting revenue, and strategic planning . It also helps you maintain a forward-focused mindset.

Each financial forecast plays a major role in determining how much attention is given to individual expense items. For example, if you forecast high-level trends for general planning purposes, you can rely more on broad assumptions than specific details. However, if your forecast is concerned with a business’s future, such as a pending merger or acquisition, it's important to be thorough and detailed.

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Forecasting with Pro Forma Statements

A common type of forecasting in financial accounting involves using pro forma statements . Pro forma statements focus on a business's future reports, which are highly dependent on assumptions made during preparation⁠, such as expected market conditions.

Because the term "pro forma" refers to projections or forecasts, pro forma statements apply to any financial document, including:

• Income statements
• Balance sheets
• Cash flow statements

These statements serve both internal and external purposes. Internally, you can use them for strategic planning. Identifying future revenues and expenses can greatly impact business decisions related to hiring and budgeting. Pro forma statements can also inform endeavors by creating multiple statements and interchanging variables to conduct side-by-side comparisons of potential outcomes.

Externally, pro forma statements can demonstrate the risk of investing in a business. While this is an effective form of forecasting, investors should know that pro forma statements don't typically comply with generally accepted accounting principles (GAAP) . This is because pro forma statements don't include one-time expenses—such as equipment purchases or company relocations—which allows for greater accuracy because those expenses don't reflect a company’s ongoing operations.

7 Financial Forecasting Methods

Pro forma statements are incredibly valuable when forecasting revenue, expenses, and sales. These findings are often further supported by one of seven financial forecasting methods that determine future income and growth rates.

There are two primary categories of forecasting: quantitative and qualitative.

Quantitative Methods

When producing accurate forecasts, business leaders typically turn to quantitative forecasts , or assumptions about the future based on historical data.

1. Percent of Sales

Internal pro forma statements are often created using percent of sales forecasting . This method calculates future metrics of financial line items as a percentage of sales. For example, the cost of goods sold is likely to increase proportionally with sales; therefore, it’s logical to apply the same growth rate estimate to each.

To forecast the percent of sales, examine the percentage of each account’s historical profits related to sales. To calculate this, divide each account by its sales, assuming the numbers will remain steady. For example, if the cost of goods sold has historically been 30 percent of sales, assume that trend will continue.

2. Straight Line

The straight-line method assumes a company's historical growth rate will remain constant. Forecasting future revenue involves multiplying a company’s previous year's revenue by its growth rate. For example, if the previous year's growth rate was 12 percent, straight-line forecasting assumes it'll continue to grow by 12 percent next year.

Although straight-line forecasting is an excellent starting point, it doesn't account for market fluctuations or supply chain issues.

3. Moving Average

Moving average involves taking the average—or weighted average—of previous periods⁠ to forecast the future. This method involves more closely examining a business’s high or low demands, so it’s often beneficial for short-term forecasting. For example, you can use it to forecast next month’s sales by averaging the previous quarter.

Moving average forecasting can help estimate several metrics. While it’s most commonly applied to future stock prices, it’s also used to estimate future revenue.

To calculate a moving average, use the following formula:

A1 + A2 + A3 … / N

Formula breakdown:

A = Average for a period

N = Total number of periods

Using weighted averages to emphasize recent periods can increase the accuracy of moving average forecasts.

4. Simple Linear Regression

Simple linear regression forecasts metrics based on a relationship between two variables⁠: dependent and independent. The dependent variable represents the forecasted amount, while the independent variable is the factor that influences the dependent variable.

The equation for simple linear regression is:

Y ⁠ = Dependent variable⁠ (the forecasted number)

B = Regression line's slope

X = Independent variable

A = Y-intercept

5. Multiple Linear Regression

If two or more variables directly impact a company's performance, business leaders might turn to multiple linear regression . This allows for a more accurate forecast, as it accounts for several variables that ultimately influence performance.

To forecast using multiple linear regression, a linear relationship must exist between the dependent and independent variables. Additionally, the independent variables can’t be so closely correlated that it’s impossible to tell which impacts the dependent variable.

Qualitative Methods

When it comes to forecasting, numbers don't always tell the whole story. There are additional factors that influence performance and can't be quantified. Qualitative forecasting relies on experts’ knowledge and experience to predict performance rather than historical numerical data.

These forecasting methods are often called into question, as they're more subjective than quantitative methods. Yet, they can provide valuable insight into forecasts and account for factors that can’t be predicted using historical data.

6. Delphi Method

The Delphi method of forecasting involves consulting experts who analyze market conditions to predict a company's performance.

A facilitator reaches out to those experts with questionnaires, requesting forecasts of business performance based on their experience and knowledge. The facilitator then compiles their analyses and sends them to other experts for comments. The goal is to continue circulating them until a consensus is reached.

7. Market Research

Market research is essential for organizational planning. It helps business leaders obtain a holistic market view based on competition, fluctuating conditions, and consumer patterns. It’s also critical for startups when historical data isn’t available. New businesses can benefit from financial forecasting because it’s essential for recruiting investors and budgeting during the first few months of operation.

When conducting market research, begin with a hypothesis and determine what methods are needed. Sending out consumer surveys is an excellent way to better understand consumer behavior when you don’t have numerical data to inform decisions.

Improve Your Forecasting Skills

Financial forecasting is never a guarantee, but it’s critical for decision-making. Regardless of your business’s industry or stage, it’s important to maintain a forward-thinking mindset—learning from past patterns is an excellent way to plan for the future.

If you’re interested in further exploring financial forecasting and its role in business, consider taking an online course, such as Financial Accounting , to discover how to use it alongside other financial tools to shape your business.

Do you want to take your financial accounting skills to the next level? Consider enrolling in Financial Accounting —one of three courses comprising our Credential of Readiness (CORe) program —to learn how to use financial principles to inform business decisions. Not sure which course is right for you? Download our free flowchart .

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Budget vs Forecast: Functions and Differences

Join over 2 million professionals who advanced their finance careers with 365. Learn from instructors who have worked at Morgan Stanley, HSBC, PwC, and Coca-Cola and master accounting, financial analysis, investment banking, financial modeling, and more.

Budgets and forecasts play a crucial role in companies’ financial well-being during every stage of the business lifecycle. They help businesses achieve their financial goals and targets and prepare for potential uncertainties.

And while budgets and forecasts work in tandem, they serve distinct functions. Put simply, the budget sets out a firm’s strategic direction, while forecasts track whether it meets its financial goals on an operational level.

But that’s not the only difference between a budget and a forecast. Let’s define the concepts and juxtapose budget vs forecast.

Table of Contents:

What is a budget, what is a financial forecast, key budget vs forecast differences, how budgeting and forecasting work together, budget vs forecast: wrap up.

A budget is a financial tool for estimating financial performance over a specified period. It helps companies prepare for uncertainties and serves as a baseline to compare targets to actual results.

The main budget components include:

• Revenue and expenditure estimates
• Anticipated cash flows
• Fixed and variable costs
• Expected profit and loss
• Anticipated debt

The benefits of budgeting are numerous. This process helps companies make important financial decisions in various ways. For instance, capital budgeting allows for the adequate allocation of funds across projects.

Budgets are prepared for a particular period—typically, one year. That’s why it is usually referred to as the Annual Business Plan (ABP), which outlines the following factors (among others):

• Development standards and procedures
• Prevailing market conditions
• Relationships between the company, customers, and vendors
• Calculation methods, assumptions, and others

The primary types of budgets businesses prepare include:

• Cash flow budget
• Capital budget
• Operating budgets (sales, production, SG&A, etc.)

The final budget—also known as the Master budget —combines all of the above. Learn more about budget preparation in our dedicated article .

The following is an example of a sales budget:

Before we continue with the budgeting vs forecasting comparison, let’s define forecasting.

Financial forecasting is the process of estimating and providing insights into a company’s financial well-being and future. It relies on historical sales, purchases, expenses, and costs data, as well as pro-forma financial statements: balance sheets, cash flow statements, and income statements with projected financial data. Forecasts can also be based on position statements, industry trend analyses, and competitor trends.

The purpose of forecasting is to estimate companies’ future financial well-being and make financial decisions based on the latest available information and trends. This activity also helps businesses allocate their budgets adequately and evaluate whether the business plan is achieved.

The following table is a financial forecast for the fictional company XYZ Inc.:

As you can see, forecasted net sales may be the same as the budgeted (in Q1), above them (in Q4), or under them (in Q2 & Q3).

Budgeting involves creating an ABP for a specific period, including projected revenue, expenses, cash flows, and investments. It requires input from multiple departments such as sales, production, finance, marketing, etc.

Forecasting, on the other hand, projects where a company is headed based on the latest available information. While budgets are static and usually prepared for a year or longer periods, forecasts are updated monthly or quarterly.

The following budgeting vs forecasting comparison table summarizes the primary differences:

Budgets and forecasts serve distinct purposes, catering to different needs within financial planning and management. The former provides a detailed plan for resource allocation, while the latter offers a forward-looking estimate of financial performance based on currently available information. Both tools are valuable for decision-making and financial control within an organization.

Budgeting provides a baseline for performance analysis by comparing projections with actual results to determine the variance. And forecasting helps a company estimate its financial future using historical data.

Combined, budgeting and forecasting provide a complete, comprehensive, and reliable financial plan or strategy. Through forecasting, the company can determine whether it’s on the right course and set realistic expectations.

With the help of budgets, these expectations turn into concrete goals, which are compared to reality at the end of the period. These processes allow companies to evaluate performance, adjust expectations, set realistic goals, and ultimately, grow.

Budgets and forecasts are crucial financial planning components. They help manage financial risks and develop action plans to achieve targets. The current article provides a very brief overview of their primary functions and differences.

Enroll in our FP&A: Building a Company’s Budget course to learn more about the budget and forecast preparation process. Sign up for 365 Financial Analyst and try our learning program for free.

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FP&A Guide: Budget Preparation Steps

The most in-demand fp&a skills in 2024.

Financial Forecasting: How to Do It with Different Methods, Models, & Software

Published: June 07, 2023

Planning for your company's future is significantly easier and more effective when you have a picture of what that future might look like. That's why any business interested in sound financial planning needs to have a grip on financial forecasting — the process of making accurate projections that can frame thoughtful, productive financial decisions in real time.

Here, we'll explore the concept of financial forecasting in depth, review some popular financial forecasting models, go over some prominent financial forecasting methods, and see some of the best financial forecasting software solutions on the market.

1. What is financial forecasting?

Forecasting vs. Budgeting

2. Financial Forecasting Models

• Top-Down Financial Forecasting
• Delphi Financial Forecasting
• Statistical Forecasting
• Bottom-Up Financial Forecasting

3. Financial Forecasting Methods

• Straight Line
• Simple Linear Regression
• Multiple Linear Regression
• Moving Average

4. How to do Financial Forecasting

5. Financial Forecasting Software

What is financial forecasting?

Financial forecasting is a process where a business leverages its current and past financial information to project its future financial performance. Forecasts are typically applied to assist with budgeting, financial modeling, and other key financial planning activities.

Financial forecasting is often conflated with the other key financial planning processes it generally informs — namely, budgeting. Though the two activities are often closely linked, it's important to differentiate between them.

The difference between a financial forecast and a budget boils down to the distinction between expectations and goals. A forecast details what a business can realistically expect to achieve over a given period.

When done correctly, it represents a reasonable estimate of how a company will likely perform — based on current and historical financial data, broader economic trends, foreseeable factors that might impact performance, and other variables that can be viably accounted for.

A budget, on the other hand, is the byproduct of a financial analysis rooted in what a business would like to  achieve. It's typically updated once per year and is ultimately compared to the actual results a business sees to gauge the company's overall performance.

Now that we have a picture of what financial forecasting is, let's take a look at some of its most popular models.

Financial Forecasting Models

1. top-down financial forecasting.

Top-down forecasting is a financial forecasting model where a company starts by analyzing broader market data and ultimately whittles down company-specific revenue projections from there.

It's one of the more simple, straightforward forecasting models — essentially amounting to a company looking at its total market size and calculating potential revenue based on its assumed market share with the help of  fp&a software  to collect all the data you need.

Top-Down Financial Forecasting Example

Let's say a company occupies space in a market that generates an estimated $1,000,000,000 in revenue annually. If the business assumes it will have a market share of 2.5%, a top-down forecast would suggest that it will see $25,000,000 in revenue in the coming year.

Benefits of Top-Down Forecasting

• It provides a more streamlined approach for larger, established businesses with diverse revenue sources than a concentrated, product-level forecast.
• It's often the only viable forecasting avenue for early-stage companies without extensive financial data.

Drawbacks of Top-Down Forecasting

• It's often seen as hastier and more superficial than more granular forecasting methods.
• A top-down forecast is generally seen more as a starting point than a concrete projection.

2. Delphi Forecasting

The term "Delphi" here is a reference to the ancient Greek city where the Greeks consulted the mythical oracle Pythia . Fittingly, the Delphi forecasting method involves financial forecasters consulting experts for their takes on projections.

With this method, a business sends multiple rounds of questionnaires to a panel of experts, covering the company's financial data. With each new round, the experts see an aggregated summary of the previous round and adjust their perspectives accordingly. Ultimately, the hope is that a few rounds can produce a consensus among the experts that can be applied to the company's financial projections.

Delphi Financial Forecasting Example

If a company were to leverage the Delphi model, it would gather a diverse array of experts and send them questionnaires without any of them ever meeting face-to-face. After one round, the experts would each receive a summary, detailing what the other experts thought with respect to the business's potential financial performance.

The experts would be at least partially moved by the group response and submit a new questionnaire accordingly. The panel would continue to receive questionnaires until it arrived at a consensus, and the forecast would be based on that insight.

Benefits of Delphi Forecasting

• It tends to be more objective than conventional, in-house forecasting.
• Contributions are anonymous, so respondents can answer candidly.

Drawbacks of Delphi Forecasting

• The method doesn't allow for a productive, open dialogue like a face-to-face meeting would.
• Response times can be long or unpredictable, prolonging forecast delivery.

3. Statistical Forecasting

Statistical forecasting is a broad term that accounts for a variety of forecasting methods. At its core, the model is exactly what it sounds like — forecasting based on statistics. More specifically, the term is essentially a catch-all that covers forecasting rooted in the use of statistics derived from historical, quantitative data.

Statistical Financial Forecasting Example

One method that generally falls under the statistical financial forecasting umbrella is the moving average method listed below. A company might look at the revenue it generated over the past 100 days and apply that statistic to its potential performance over the next similar period.

Benefits of Statistical Forecasting

• It rests on a more solid basis than other methods.
• It can be more straightforward than other methods — provided you have the right data.

Drawbacks of Statistical Forecasting

• Certain methods that fall under this umbrella can provide relatively hasty estimates, relative to other models.
• Companies without extensive historical data might not be able to produce reliable statistical forecasts.

4. Bottom-Up Financial Forecasting

As you can probably assume, bottom-up financial forecasting is essentially the opposite of top-down forecasting — it's a model where a company starts by referencing its detailed, ground-level customer or product information and works its way up to a broader revenue projection.

Bottom-Up Financial Forecasting Example

A bottom-up financial forecast could start with a business taking a look at its sales volume — or the total number of units of its product it moved in a given period — from the previous year. Then, it would estimate the price it expects to charge for that product in the coming year. From there, it would calculate its projected revenue by multiplying the two figures.

Obviously, that example is unrealistically straightforward. In most cases, the business in question here would consider other lower-level variables as well — potentially including customer-related information like total customers or retention rate.

Benefits of Bottom-Up Forecasting

• The model allows for more detailed analysis than most others.
• It offers more room for input from various departments.

Drawbacks of Bottom-Up Forecasting

• Any errors made at the micro-level can be amplified to the macro-level with this model.
• A thorough bottom-up forecast can be time-consuming and particularly labor-intensive.

Financial Forecasting Methods

1. Straight Line

True to its name, straight line forecasting is probably the most straightforward financial forecasting method businesses can leverage. It's rooted in basic math and tends to provide rougher projections than the other, more sophisticated methods listed here.

With straight line forecasting, a business gathers rough growth estimates — typically pulled from past figures — and applies them to coming months, quarters, or years. It's generally employed when a company assumes it will see steady growth over a given period.

For instance, if your business has seen revenue reliably grow 5% year over year for the past four years, you might use that figure to guide your straight line forecasting and assume that level of growth will continue for the next few years.

2. Simple Linear Regression

The simple linear regression is a common financial forecasting method where a business explores the relationship between two variables — one independent and one dependent. For instance, a company could use this method to forecast revenue by gauging how it might be impacted by shifts in GDP.

3. Multiple Linear Regression

Simple linear regression analysis often isn't enough to make accurate financial projections, as financial performance is rarely a function of a single factor. The nature of the multiple linear regression is covered by its name — instead of trying to predict how financial performance will play out in response to a single variable, the model considers two or more independent factors.

4. Moving Average

Moving average forecasting is a method most commonly used to identify the trend-direction of a stock, but businesses can still leverage it to project their financial performance. It involves taking the arithmetic mean of a dataset from a past period and applying that average to future projections. The method is typically used to evaluate potential performance over shorter periods — like weeks, months, or quarters.

How to do Financial Forecasting

1. Define your purpose for using a financial forecast.

To get the most out of a financial forecast, you have to know why you're using it in the first place. Ask yourself questions such as:

• What are you hoping to learn and take away from its results?
• Are you trying to get a better gauge of the company budget?
• Are you trying to reach a certain goal or threshold for product sales?

When you have clear intent behind your financial forecast, you'll have a more concise and clear result to search for once you begin.

2. Gather historical data.

To track the progress of your financial forecast, you have to have a good idea of your current and past finances. Take the time to analyze your historical financial data and records, including:

• Revenue and losses
• Equity and liabilities
• Fixed costs
• Investments
• Earnings per share

Your forecast will only be as accurate as the information you collect, so get as much relevant data as possible for better results and understanding.

3. Set a time frame for your forecast.

Decide how far into the future you're committed to recording and documenting your business' financial performance. This can look like weeks, months, quarters, or even years of data collection. 

It's most common for a business to conduct a forecast over the course of a fiscal year, but it's unique for every business. And if you need to adjust your forecast as time goes by, or if your goals change, you're ultimately in control and can make adjustments if need be.

4. Choose a forecasting method.

We've already give you four financial forecasting methods, so when choosing the one for your business, make sure it aligns with your previously declared purpose and goals.

5. Monitor and analyze your forecast results.

As your financial forecast delivers new data, you should monitor and analyze it differently. When you get enough data, try to think about how you can use it:

• Identify potential issues: Monitoring and analyzing financial results can help a business identify potential issues before they become more significant problems. For example, if expenses are higher than anticipated, a business can identify the cause and take corrective action to prevent it from negatively impacting financial performance.
• Measure progress towards goals: A financial forecast provides a business with financial goals and expectations. Weighing financial results against these goals enables a business to measure its progress toward achieving them. This can help the business identify where it is falling short and adjust to get back on track.
• Manage cash flow: Monitoring and analyzing financial results can give a business insights into its cash flow situation. By understanding how much cash is coming in and going out, a business can make smarter decisions about budgeting and spending.

And it doesn't have to be a tedious task to analyze your financial data, thankfully there's plenty of forecasting, decision-making and financial-planning tools available for this purpose. Let's go through some of our favorites.

Financial Forecasting Software

1. sage intacct, pricing: contact for pricing.

Sage Intacct is a multifaceted accounting and financial planning software with an accessible interface and a suite of features that can streamline your financial forecasting time by over 50%. The platform's automated forecasting resources effectively eliminate the stress, legwork, and room for error that often come with financial planning via spreadsheets.

Best for Collaboration

Sage Intacct separates itself from similar applications through its accessibility and room for collaboration. The software is particularly user-friendly and offers a singular, centralized solution for virtually any stakeholder within an organization to easily contribute to and make sense of financial projections.

2. PlanGuru

Pricing: plans starting at $99 per month.

PlanGuru is a dedicated financial forecasting software — supporting 20 separate forecasting methods that can cover projections of up to 10 years. The program also allows you to incorporate non-financial data into your forecasts and has scenario analysis features to help you interpret the ramifications of potentially impactful events. PlanGuru also offers a range of plans to suit most SMBs' budgets.

Best for Pure Financial Forecasting

Some of the other resources listed here are multifaceted accounting solutions that happen to cover financial forecasting — not PlanGuru. This application is primarily dedicated to creating financial projections.

As I mentioned, it offers 20 unique financial forecasting methods to support more effective strategic planning — along with a host of other features tailored to help you gauge your future financial performance. If you're interested in a cost-effective, forecasting-specific platform, look into PlanGuru.

3. Workday Adaptive Planning

Workday Adaptive Planning provides financial forecasting resources that reconcile accessibility with powerful functionality. The software lets you leverage both real-time financial and operational data to create and compare multiple accurate, effective what-if scenario models. It also allows you to forecast across any time horizon — whether it be daily, monthly, quarterly, or long-term.

Best for a Dynamic Range of Forecasting Options

Workday Adaptive Planning's ability to support detailed bottom-up and top-down forecasts makes it a particularly attractive option for businesses of virtually any size. It allows you to create compelling forecasts based on targets from executive guidance or ground-level operational plans.

That dynamic range of forecasting options helps set the program apart from similar options. If you're interested in software that lets you forecast from various perspectives without sacrificing accuracy or effectiveness, look into Workday Adaptive Planning.

4. Limelight

Limelight is an integrated, web-based financial planning that provides businesses with a centralized solution for almost all of their forecasting needs. Designed primarily to suit finance and accounting teams, the software offers powerful general automation and automated data integration to streamline and simplify forecasting without losing out on quality.

Best for a Familiar, Excel-Esque UX

Limelight's user experience is designed to reflect Excel — making it a familiar, particularly easy option for CFOs, controllers, budget managers, and other users to adapt to. If you're interested in a powerful forecasting resource with that kind of accessibility, Limelight might be your best option.

It's never too late to run a financial forecast.

Forecasting is a central component of sound, productive financial planning. If you have no idea what to expect financially, you'll have a hard time preparing for obstacles, setting attainable goals, and identifying aspects of your business that should be of particular interest. No matter the scale or nature of your organization, having a pulse on your financial future is always in your best interest.

Editor's note: This article was originally published in June 2022 and has been updated for comprehensiveness.

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Understanding The Distinction Between a Business Plan & Business Planning

In the dynamic world of entrepreneurship, our choice of words matters. Our vocabulary can often become a veritable alphabet soup of jargon, acronyms, and those buzzwords (I'm looking at you, "disrupt").

And let's not get started on business cliches – "circle back," "synergy," “deep-dive,” etc.

Yet sometimes, it's worth pausing to consider the words we casually sprinkle around in our business conversations. In a previous article, we explored the differences between strategic and tactical business planning , two related but distinct approaches to guiding a business. Now, we're going to delve into another pair of terms that often get used interchangeably but have unique implications: "business plan" (the noun) and "business planning" (the verb).

The business plan, a noun, is a tactical document. It's typically created for a specific purpose, such as securing a Small Business Administration (SBA) loan . Think of it as a road map – it outlines the route and the destination (in this case, the coveted bank loan). But once you've reached your tactical goal (in this case, getting the loan), it often gets shoved in the glove compartment, forgotten as part of the organization's action plan until the next road trip (i.e., additional funding ).

Business planning is not a static concept, but rather a dynamic verb. It's an ongoing process that necessitates continual adjustments. It's about creating a holistic, interconnected value-creating strategic plan that benefits all stakeholders. This includes attracting top-tier employees, ensuring a return on lending or investment, and making a positive impact on the community, whether online or in real life.

That being said, the customer remains at the heart of this process. Without customers, there are no sales, no revenue, and no value. Everything else is contingent on this key element.

If we were to compare the business plan to a map, then business planning would be the journey. It's a continuous process of making strategic decisions, adapting to new paths, and steering the business towards its goals. Sometimes, it even involves redefining objectives midway.

So, let's do a "deep-dive" (I couldn't resist) into these two terms, examining their application in the real world. Along the way, we'll uncover some tools that can aid us in the ever-evolving process of strategic business planning and the more finite task of crafting a winning business plan.

The Business Plan is a Document

Alright, let's take a closer look at a phrase we've all tossed around: the business plan. Imagine it as the detailed blueprint of your organization's goals, strategies, and tactics. It's like the North Star for your entrepreneurial ship, shedding light on the key questions: what, why, how, and when (speaking of questions, here are some FAQs about the business plan ).

Writing a solid business plan isn't easy , especially if you're just dipping your toes into the world of business planning. But don’t worry; we'll get to that (eventually).

So, let's break it down. What does a business plan document consist of, exactly?

• Executive Summary: Just as it sounds, this is a quick overview of the nitty-gritty that's in the rest of your business plan. It's the introduction to your organization, highlighting your mission statement and serving up the essential details like ownership, location, and structure.
• Company Overview: This is where you will detail your products and/or services, their pricing, and the operational plan. If you're opening a restaurant, this section is where you present your menu, and it's also where you talk about your ingredient sourcing, the type of service you'll provide, and the ambiance you're aiming for. 
• Market Analysis Summary: This section demands a comprehensive analysis of your industry, target market, competitors, and your unique selling proposition. Without access to top-notch (and often not free) research tools, it can be challenging to find current industry data. Check out our  guide on the best market research tools to get started.
• Strategy and Implementation Summary: Here, you'll lay out your short-term and long-term objectives along with the strategies you'll implement to attract and retain customers. This is where you’ll talk about all the different marketing and sales strategies you'll use to charm your future customers.
• Management Summary: This is your chance to spotlight your company's key personnel. Detail the profiles of your key leaders, their roles, and why they're perfect for it. Don't shy away from acknowledging talent gaps that need to be filled, and do share how you plan to fill them!
• Pro Forma Financials: This is where you get down to the dollars and cents with a detailed five-year revenue forecast along with crucial financial statements like the balance sheet and the profit & loss statement.

A business plan is an essential instrument, not just for securing funding, but also for communicating long-term goals and objectives to key stakeholders. But, while a business plan is essential for many circumstances, it's important to understand its scope and limitations. It's a tactical tool, an important one, but it's not the be-all and end-all of business strategy. Which brings us to our next point of discussion: business planning.

Business Planning is a Process

If we view the business plan as a blueprint, then business planning is the architect. But let's be clear: we're not building just any old house here. We're building the  Winchester Mystery House of business. Just as the infamous Winchester House was  constantly under construction , with new rooms being added and old ones revamped, so too is your business in a state of perpetual evolution. It's a dynamic, ongoing process, not a one-and-done event.

In the realm of business planning, we're always adding 'rooms' and 'corridors' – new products, services, and market strategies – to our 'house'. And just as  Sarah Winchester reputedly consulted spirits in her Séance Room to guide her construction decisions, we consult our customers, market data, and strategic insights to guide our strategy. We're in a constant state of assessing, evolving, executing, and improving.

Business planning touches all corners of your venture. It includes areas such as product development, market research, and strategic management. It's not about predicting the future with absolute certainty – we’re planners, not fortune tellers. It's about setting a course and making calculated decisions, preparing to pivot when circumstances demand it (think global pandemics).

Business planning is not a 'set it and forget it' endeavor. It's akin to being your company's personal fitness coach, nudging it to continually strive for better. Much like physical fitness, if you stop the maintenance, you risk losing your hard-earned progress.

Business Planning Case Study: Solo Stove

Now that summer is here, my Solo Stove stands as a tangible testament to effective business planning.

For those unfamiliar, Solo Stove started with a simple yet innovative product – a smoke-limiting outdoor fire pit that garnered over $1.1 million on Kickstarter in 2016, far exceeding its original objective. Since then, it has expanded its portfolio with products tailored to outdoor enthusiasts. From flame screens and fire tools to color-changing flame additives, each product is designed to fit seamlessly into modern outdoor spaces, exuding a rugged elegance that resonates with their target audience.

This strategic product development, a cornerstone of business planning, has allowed Solo Stove to evolve from a product to a lifestyle brand. By continually listening to their customers, probing their desires and needs, and innovating to meet those needs, they've built a brand that extends beyond the products they sell.

Their strategy also includes a primary "Direct To Consumer" (DTC) revenue model, executed via their e-commerce website. This model, while challenging due to increased customer acquisition costs, offers significant benefits, including higher margins since revenue isn’t split with a retailer or distributor, and direct interaction with the customer.

Through its primary business model,  Solo Stove has amassed an email database of over 3.4 million customers . This competitive advantage allows for ongoing evaluation of customer needs, driving product innovation and improvement, and enabling effective marketing that strengthens their mission. The success of this approach is evident in the company's growth: from 2018 to 2020,  Solo Stove’s revenue grew from $16 million to $130 million , a 185% CAGR.

While  85% of their revenue comes from online DTC channels, Solo Stove has also enhanced their strategic objectives by partnering with select retailers that align with their reputation, demographic, and commitment to showcasing Solo Brands’ product portfolio and providing superior customer service.

Solo Stove's success underscores how comprehensive business planning fosters regular assessment, constant evolution, and continual improvement. It's more than setting goals – it's about ceaselessly uncovering ways to deliver value to your customers and grow your business.

However, even successful businesses like Solo Stove can explore additional strategic initiatives for growth and diversification, aligning with their strategic direction and operational planning. For instance, a subscription model could provide regular deliveries of products or a service warranty, creating a consistent revenue stream and increasing customer loyalty. Alternatively, a B2B model could involve partnerships with adventure tourism operators, who could purchase Solo Stove products in bulk.

These complementary business models, when integrated into the operational plan, could support the primary DTC model by driving customer acquisition, providing ongoing revenue streams and expanding the customer base. This strategic direction ensures that Solo Stove continues to thrive in a competitive market.

The Interplay between the Business Plan (Noun) and Business Planning (Verb)

In the realm of business strategy, there's an intriguing chicken-and-egg conundrum: which comes first, the business plan or business planning? The answer is both straightforward and complex: they're two sides of the same coin, each indispensable in its own right and yet inextricably linked.

The process of business planning informs and modifies the business plan, just as the business plan provides a strategic foundation for the planning process. This interplay embodies the concept of Model-Based Planning™, where the business model serves as a guide, yet remains flexible to the insights and adaptations borne out of proactive business planning.

Let's revisit the Solo Stove story to elucidate this concept. Their business model, primarily direct-to-consumer, laid the groundwork for their strategy. Yet, it was through continuous business planning  –  the assessment of customer feedback, market trends, and sales performance –  that they were able to refine their model, expand their product portfolio, and enhance their growth objectives. Their business plan wasn't a static document but a living entity, evolving through the insights gleaned from ongoing business planning.

So, how can you harness the power of both the tactical business plan and strategic business planning in your organization? Here are a few guiding principles:

• Embrace Model-Based Planning™: Start with a robust business model that outlines your strategic plan. But remember, this isn't set in stone—it's a guiding framework that will evolve over time as you gain insights from your strategic planning process.
• Make business planning a routine: Regularly review and update your business plan based on your findings from market research, customer feedback, and internal assessments. Use it as a living document that grows and adapts with your business.
• Foster open communication: Keep all stakeholders informed about updates to your business plan and the insights that informed these changes. This promotes alignment and ensures everyone is working towards the same goals.
• Be agile and adaptable: A key part of business planning is being ready to pivot when necessary . Whether it's a global pandemic or a shift in consumer preferences, your ability to respond swiftly and strategically to changing circumstances is crucial for long-term success.

Fanning the Flames: From Planning to Plan

The sparks truly ignite when you understand the symbiotic relationship between tactical business plans, strategic business planning, and the achievement of strategic goals. Crafting a tactical business plan (the noun) requires initial planning (the verb), but then you need to embark on continuous strategic planning (the verb) to review, refine, and realign your strategic business plan (the noun). It's a rhythm of planning, execution, review, and adjustment, all guided by key performance indicators.

Business planning, therefore, isn't a one-off event, but rather an active, ongoing process. A business plan needs constant nurturing and adjustment to stay relevant and guide your organization's path to success. This understanding frames your business plan not as a static document, but as a living, breathing entity, evolving with each step your business takes and each shift in the business landscape. It's a strategic roadmap, continually updated to reflect your organization's objectives and the ever-changing business environment.

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Budgeting Vs Forecasting: What’s the Difference?

Posted april 10, 2023 by elon glucklich.

It’s a question we get asked often by accountants and business consultants who are beginning Strategic Advising services : “I do budgeting already. What’s the difference between a budget and a financial forecast?”

The different considerations in financial budgeting vs forecasting are fairly straightforward, but also intriguing, in that it they a lot to do with the real value of small business advising: helping your customers survive and thrive. By looking at the key differences between a budget and a forecast, we can start to understand why financial forecasting is important to your advisory services, and how you can use a forecast to build a roadmap for your small business clients.

What is a budget?

A budget is an income and spending plan that outlines the revenue and expenses in a business over a certain period of time. Budgets are typically prepared once a year, and it’s common to compare budget versus actual results as time progresses.  

In practice, budgeting is primarily focused on expenses; allocating expenditures for a set period of time, usually in the short-term (quarterly or yearly). Budgets are typically prepared by detailed chart of account line items: office supplies, training, travel, and so on. Income is included, but the budgeting process is most often concerned with setting spending limits through conservative estimates. 

Budgets are a useful first step for businesses to understand their financial picture. The income expectations and spending limits establish useful guidelines for a business to follow to remain healthy.  Budgets are a good first step to larger, strategic planning.  However, due to their limitations and conservative nature, budgeting is really a tactical exercise, concerned with the details of spending to keep profit and cash positive.

What is a financial forecast?

Financial forecasting is the process of making educated guesses about what is reasonably possible for a business, and applying business rules and drivers (a financial model) to turn those guesses into projections.  A financial forecast  is typically concerned with where a company would like to go in the long-term— its growth . Leveraging a forecast provides a full financial picture of your business—income, cash, and equity.

For instance, if a company is netting X amount in revenues per year and wants to grow to 2x revenues, how will they get from here to there? What will their full financial picture look like when they do? Or, if an economic downturn occurs, and the business must determine how it will respond to survive, what changes will it have to make? A financial forecast is a tool for building these financial scenarios based on desired outcomes. 

Complete financial forecasts include all three financial statements: profit and loss, cash flow and balance sheet.  The process of forecasting typically begins with sales projections and evolves from there, by referring to historical performance and applying growth patterns over time to reach desired goals. Expenses are then layered in, beginning with direct costs and finally adding indirect expenses to meet desired net profit. Assumptions about cash receipts and payments are added to  forecast cash flow, and other assumptions and business rules can be used, like information about inventory needs or financing.

Unlike budgets, forecasts are not prepared by accounting for every line item—they are more of a summary in nature. Instead, you’ll be incorporating your chart of account lines into larger forecast categories, which represent strategic income streams. 

What is the importance of financial forecasting?

Forecasting helps a company make long-term strategic decisions like establishing partnerships, sales plans, and staffing. It allows a business to see its full financial picture of profit, cash, and equity in the long term. For this reason, forecasts span a longer period of time than budgets—usually 18 to 36 months, and include all three financial statements: profit and loss, cash flow, and balance sheet. 

Once a  strategic forecast  is built, a well-informed budget can be devised based on the targeted forecast projections. The budget sets detailed spending limits to help achieve the bigger picture forecast goals. This is how the two methods come together to support strong company management.  As a business advisor, consultant or accountant, you might be more familiar with budgeting, and might even build budgets in your client’s accounting software. I encourage you to practice forecasting until you become comfortable with it and then use it as a tool to  help your strategic advisory clients  plan for growth.

Key differences between budgeting vs forecasting

Focus: details vs guides.

Budgets are detail-oriented

Budgets establish spending limits that should be followed. They estimate revenues and expenses, and set clear financial goals for a company. These guidelines help maintain control over a company’s finances and ensure that resources are allocated efficiently.

Forecasts are guides

Forecasts focus on high-level goals and help businesses develop a strategy. They provide insights into a company’s financial health and direction, helping businesses develop a strategy to achieve their high-level goals. Forecasts are based on historical data and trends, allowing companies to make adjustments to their plans in response to changing market conditions.

Timing: Annual process vs big picture for the future

Annual process

Businesses normally have an annual budgeting process. Companies typically establish budgets for a one-year period, beginning 1-2 months before the end of the fiscal year. Some businesses may adjust their budgets throughout the year to adapt to changing circumstances.

Forecasts look at the big picture

Forecasts help businesses plan out growth goals in advance. They help owners plan for both short-term and long-term growth goals, considering various factors such as market trends, economic conditions, and company-specific developments.

Impact on business: Tactical vs strategic

Tactical budgets

Tactical budgets manage month-to-month operations, set expenditure limits, and help companies monitor their financial performance. Budgets are useful for tracking progress towards financial targets and identifying areas that may require attention or improvement.

Strategic forecasts

Strategic forecasts help a company make forward-looking decisions for the growth of a business. They support long-term decision-making and help companies shape their business plans. Forecasts can inform decisions related to production, inventory, and resource allocation, as well as help identify potential opportunities and risks in the market.

Developing business strategy with forecasting

A well-written financial forecast should be a  roadmap for running a business . A forecast is  based on business drivers, like unit sales, hours billed, or memberships sold. Those drivers, once revealed and documented, can be tracked and measured, which allows the business owner to stay on top of very practical targets month by month. These are sometimes called  key performance indicators , or KPIs.

On the expense side, the financial roadmap will dictate when major expense events can occur, based on sales and net profit. Purchasing capital equipment or hiring new employees are a couple of examples of expense events.

Financial forecasts should be expanded into scenarios for best case, worst case, and working case. This way the business has a plan for growth as well as for lean times. This is especially relevant in periods of  economic downturn , where small businesses may be struggling with a decrease in demand and changes to their supply chain. 

If business scenarios are only considered using budgeting techniques, the tendency is to be overly cautious. Growth requires stretching the goals and aiming high. The industry term  stretch-goal  is used to indicate when a business is setting a higher goal than originally sought or thought possible. When reasonable stretch goals are set and recorded, they become the plan of action. 

Strategic advising: financial forecasting in action

And here’s where the discussion becomes more interesting and even exciting. What we’re saying is that a business dream, if translated into a goal, can actually be attainable with the right plan. And  you can help  your small business clients achieve their goals by helping them develop the plan. It’s a  wonderful feeling , and work worthy of undertaking. 

If your  clients are asking  for help with budgeting, they may not appreciate the difference between an operational budget and a strategic forecast for long-term growth.  Use that as an opportunity to  flex your advisory muscles  and teach them the difference.  As an advisor, you can turn your savvy with numbers into a wonderful offering to your  small business clients by applying this knowledge in your  Strategic Advising practices .

Four reasons why financial forecasts are better than budgets – Financial forecasting versus budgeting 

Financial forecasting  is similar to budgeting, but better in ways that make it more useful as a business management tool.  Here are four reasons why: 

First, financial forecasting paints an entire financial picture  of a business by addressing all three financial statements: profit and loss, cash flow, and balance sheet,  sometimes called a three-way forecast..  Budgets are typically more focused on setting expense limits, and are best made after a forecast scenario is built. 

In order to build the full picture, the forecast is based on all the elements of the underlying business model.  Besides revenue and expenses, things like capital expenditures and debt servicing, and even elements like strategic partners and other resources are considered. 

Second, financial forecasting is typically for a longer period of time .  A full forecast typically looks out over 12 – 24 months, or even longer depending on the size and maturity of the business, versus budgeting, which is usually for the current fiscal year.  

Specific, shorter periods of time can be analyzed and updated based on real world occurrences, but it takes this longer, fuller picture (often called a “look” at the business) to see how a shorter time period can affect the long term.  The longer period of time is necessary for making informed decisions.  It’s important for a business to see at least 12 months of forecasted profit and cash balances in order to make smart spending decisions.

A third difference is that forecasts are summary information, and budgets contain more detail.   A profit and loss forecast for instance, does not contain revenue and expense lines for every account, but rather summaries based on big groups.  This helps you more easily review the data, and remain strategic about decisions. 

Finally, forecasts are updated monthly, as time progresses and more is known .  To be an effective management tool it must be  up to date .  A forecast is  designed  to be updated monthly. The update is a key part of the process, because each period’s actual results bring insights to business performance, and reset the forecasted cash and profit figures.  This allows for better understanding of the business’s future and more confident decision making.  

Budgeting on the other hand is typically done once each year.  Budgets are sometimes updated mid-year, but as they are typically more focused on expense limits, the practice of updating them is not as common. 

Regular planning is important for a fiscally responsible business.  A small business owner  should  know the sales goals for the year, the direct expenses needed to support them, and the overhead costs and other fixed expenses of their business.  But when it comes to budgets versus forecasts, a well used and updated forecast can take the place of a budget. 

It’s fine to have both, and a business can certainly start with just a budget, but the forecast will provide the true financial roadmap for the business, guiding decisions and supporting a level of confidence that is unmatched with budgeting alone.

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How to Conduct a Plan Vs Actual Analysis With Spreadsheets

6 min. read

Updated March 18, 2024

I’ve spent decades working with plan v. actual in spreadsheets. I used plan vs. actual analysis once a month, comparing forecasts and budgets to actual results since I started Palo Alto Software back in the 1980s. Short of some extremely expensive budgeting software for corporations, that was the only way to do it.

For the record, this method still works. And nowadays you can get Microsoft Excel for about what a lunch costs per month, and Google Sheets — a competent alternative — for free. And there are other spreadsheets as well.

In this article, I’ll show you how to do your plan vs. actual analysis, step by step, with your accounting and your spreadsheet.

• Start with your spreadsheet

Try to think of budgets and forecasts in a horizontal layout showing categories in the leftmost column and months spreading to the right, one month per column, like this (showing only 3 months here because of space limitations)

If you scroll to the imaginary right on this cut-off spreadsheet, you scroll through 12 months and then a column summarizing for the whole year.

Spreadsheets are a programming language, not just an application. So you have the potential of infinite varieties.

Forecasting and budget math is usually simple

Don’t be put off by the look of a spreadsheet. It doesn’t take that much expertise. In the illustration above, the spreadsheet provides simple ways to calculate numbers using formulas. Cells are identified by rows and columns and calculations are normally fairly simple. For example, the math for new bicycles in the illustration above is units times price. As the next illustration shows, sales are located in cell D19 and the formula multiplies D20 (units) times D21 (price).

Categories matter

Make sure the way you organize the sales forecast in rows or items or groups matches the way your accounting (or bookkeeping) tracks them. It’s way easier to build a budget based on the categories in accounting. Rather than having to build a budget with different categories, and then convert and synchronize to compare your budget with actual results.

Match your chart of accounts, which is what accountants call your list of items that show up in your financial statements.

If the accounting divides sales into meals, drinks, and other, then the business plan should divide sales into meals, drinks, and other. So if your chart of accounts divides sales by product or service groups, keep those groups intact in your sales forecast . If bookkeeping tracks sales by product, don’t forecast your sales by channel instead.

If you’re planning for a startup business, coordinate the bookkeeping categories with the forecasting categories.

Get your last Income Statement (also called Profit & Loss) and keep it in view while you develop your future projections.

• If you don’t have more than 20 or so each rows of sales, costs, and expenses, then make the rows in the projected statement match the rows in the accounting.
• If your accounting summarizes categories for you – most systems do – consider using the summary categories in your business plan. Accounting needs detail, while planning needs a summary.

If your categories in the projections don’t match the accounting output, you’re not going to be able to track plan vs. actual well. It will take retyping and recalculating. And you’ll lose the most valuable business benefit of business planning: management, steering your company.

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• Set the right scope

Are examples here show just the sales budget of the forecast. We recommend tracking and managing plan vs. actual for all of your business financials, including not just sales but the cost of sales, expenses, profit and loss, balance sheet, and cash flow . The same methodology applies.

Some items are more important than others. You do what you can to optimize management. Generally, where plan vs. actual analysis is most likely to help with management decisions are on sales, costs, and expenses.

• Putting your actual results into a spreadsheet

This next step is why you set your categories to match your accounting outputs. Most accounting or bookkeeping software can export actual results into spreadsheet format. From there, you can copy and paste actual data, from accounting reports, into spreadsheets set to match the exact structure of your spreadsheet. For example:

Be aware that with the spreadsheet method, getting actual results into the right spreadsheet structure — matching the plan or budget — can be tricky. It’s the most likely spot for errors. Throughout the process, double-check your inputs and your settings. There are ways to error-check spreadsheets that are beyond the scope of this article.

• Calculating the plan vs. actual (Variance)

The budget or plan is one spreadsheet and the actual results another. In most spreadsheets these might be separate sheets or tabs inside a single spreadsheet or workbook.

This next illustration shows the third spreadsheet, or sheet in a workbook, with the plan vs. actual results calculated.

Positive vs negative variance

In the illustration above you can see positive variance as positive numbers in black; and negative variance as negative numbers, in red.

Take the sales of bicycles for March, the first month shown. They sold fewer than planned, 31 instead of 36; so that’s a red number, -5 , a negative variance. But they sold them for a higher average price than planned, $615 instead of $500, so the average price is a positive variance, $115. I use that example to point out the management implications of plan vs. actual analysis. The negative variance on unit sales is bad by itself, but combined with the positive variance on average price, the sales for that month might be good news.

Variance is context sensitive

The actual variance calculation depends on the context:

• For sales, whether units, price, or total sales, more is better. Calculate the variance by subtracting the planned amount (36 units, in the example above) from the actual, (31 units). That way, less than planned calculates to a negative variance (31-36 = -5).
• For costs and expenses, less is better. Calculate the variance by subtracting the actual amount from the planned amount. So if the budget was $3,600 for an expense in a given month, and you spent only $3,100, then that’s a positive variance of $500. If the budget was $3,000, and you spent $3,500, then plan – actual is $3,000 – $3,500 = -$500 , a negative variance.

Your goal is effective management, not just accounting

Variance analysis is vital to good management. You have to track and follow up on budgets, mainly through variance analysis, or the budgets are useless.

Although variance analysis can be very complex, the main guide is common sense. In general, going under budget is a positive variance, and over budget is negative variance. But the real test of management should be whether or not the result was good for business.

In the examples here, I chose those numbers on purpose, to show the difference between simple accounting calculations (called variance) and the management implications of reviewing plan or budget results, comparing them to actual results, and looking at the difference. The bicycle store owner and the management team look at the numbers and then consider the impact on the business.

In the case shown here, maybe they want to adjust marketing messaging to encourage higher-priced items; or maybe they want to adjust the marketing messaging to bring in more people who want the lower-priced item.

That’s in the human decisions, not the numbers. The answer here is not in the numbers alone. It’s in the management that follows.

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.

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Budget vs. forecast: How to do each for small businesses in 2024

W hile many business owners have to focus on managing the day-to-day, planning for the future is key to managing cash flow and finding growth opportunities. Budgeting and forecasting are essential financial tools businesses use to plan for the future, but they serve different purposes. 

Think of a budget as where you want to go, but a forecast is where you think you’ll go. Let’s look at how to determine the differences between the two and how each can help your business:

What is a budget?

A budget is a financial plan for spending based on estimates of expenses and income over a specific period (usually a year).  The purpose of a budget is to set and track financial goals for the business. It provides a framework for businesses to make strategic decisions on allocating resources and prioritizing expenses. 

Depending on the company's size, there may be a budgeting process—often done toward the end of the year. The budget tends to have input from various departments and managers. In smaller companies, the owner or a few key employees, such as the bookkeeper, handle budgeting. 

Most budgets are static and set for the company’s fiscal year, although you can  create monthly budgets . You’ll want to periodically compare the actual results to the budgeted amounts to identify discrepancies and take corrective actions if necessary.

What is a forecast?

A  financial forecast  is a projection of what will likely happen—generally at a higher level, such as crucial revenue items or total expenses.  You can forecast for various periods, such as short-term (a couple of months) or long-term (aka five years). A longer-term forecast might look out over several years and be part of a longer-term strategic business plan. Shorter-term forecasts are for operational reasons.

There are different types of forecasts, such as a revenue forecast for determining headcount, production, and inventory. For accurate forecasts, rely on up-to-date  financial reports , historical data, and market research.

Budget vs. forecast: 3 key ways they differ

Budget and forecast are important tools in financial planning for businesses. While they share some similarities, there are key differences between the two. Let’s look at three ways in which budgets and forecasts differ:  

1. Why you create them

A budget and a forecast provide a roadmap for allocating resources and guide your operations and decision-making.  But businesses tend to create: 

• A budget to set financial goals and track performance. 
• A forecast to predict future financial outcomes and make informed decisions.

Budgets help businesses maintain financial discipline by avoiding overspending and ensuring you manage effectively. It allows businesses to plan for future investments, expansion, or debt reduction by allocating resources accordingly.

Using a forecast offers several benefits for businesses. You can use them to create  pro forma financial statements  or optimize operations by aligning resources and activities with projected financial outcomes. It also helps identify potential financial gaps or shortfalls, allowing businesses to take proactive measures like securing additional funding or adjusting their spending plans.

2. What periods they cover 

Budgets and forecasts serve distinct purposes in business planning and tend to cover different periods (although they can cover the same ones).  The periods they cover are:

• Budgets generally cover set periods, such as one year.
• Forecasts cover longer-term periods, such as many years.

Budgets, once set, remain in place for the period. They provide a plan of action for the upcoming year. Forecasts can span several years, but you will want to update them on a rolling basis, such as monthly. 

Updating your forecasts will ensure accuracy and relevance. It’s a tactical tool that helps businesses monitor and adjust items like  inventory forecasts  in response to changing market trends and business conditions. 

3. What they track 

Budgets and forecasts also differ with what they track, in particular:

• Budgets primarily track planned revenue and expenses.
• Forecasts track predicted financial outcomes.

A budget's key metrics or components include revenue targets, variable costs, and debt reduction goals. By setting revenue targets and estimating expenses, budgets enable business owners and management teams to monitor progress and make necessary adjustments to achieve desired financial outcomes. 

Forecasts project future financial outcomes based on historical data, market trends, and business conditions. You can also forecast in different ways, such as  top-down vs. bottom-up forecasting .

Tracking these metrics helps business owners and management teams anticipate revenue fluctuations, prepare for market changes, and make well-informed decisions.

Best practices for budgeting and forecasting 

Ideally, you’ll use a budget as a management tool to run the business. Compare your results to your budget periodically to see how you’re doing. If expenses in a certain area exceed your budget, dig deeper to see if the overage is from overspending.

Are revenues and profits on track with the budget? Did the company add additional revenue or lose business that was part of the budget? Reviewing the budget is a key step in managing your business finances. 

Here’s how to get the most out of your budgeting efforts:

• Start with a realistic projection:  Your revenue projections will drive this part, but you should also do a  cash flow projection  and be conservative here. 
• Differentiate expenses:  Break out your essential expenses, like electricity and internet, from your discretionary expenses, which are not essential to running the company, such as entertainment. 
• Build in debt and cash:  Include debt payments and incorporate building cash reserves into your budget to ensure any extra profits are a cushion against a future downturn in business.

Forecasting is an important tool to help a company make necessary adjustments in spending and focus during the year as the business changes. For example, if a major customer plans to reduce or add to their volume of business, this will have a significant impact on operations and cash flow.

Here are some best practices for forecasting: 

• Consider using more than one  forecast :  Generally, you’ll want to create three. One that reflects an optimistic outlook, one that’s pessimistic, and one that’s most likely to happen. You can then plan for growth but must be able to make adjustments in case opportunities don’t materialize or happen slower than originally thought.
• Update your forecast regularly:  Things change, such as market conditions, so you can prepare by updating your forecast monthly or quarterly. 
• Involve key members of your team:  Leverage managers or your sales team to get a better look at what’s happening in your markets. Your forecast will be more accurate with this information. 

Using a budget and forecast, businesses can establish realistic financial goals, track their progress, and ensure ‌long-term viability.

Run your business with confidence 

While budgeting and forecasting are different functions, they are most useful when put in action together. A good forecast feeds the development of a sound budget. During the year, comparing the most recent forecast to the budget for the rest of the period can help the company adjust to changing business conditions. 

To effectively utilize budgeting and forecasting, it’s crucial to have a flexible and accessible solution. The solution should be easy to use, allowing business owners and team members from different departments to collaborate seamlessly.

This article originally appeared on the QuickBooks Resource Center and was syndicated by MediaFeed.org.

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The Essentials Of Careful Financial Planning And Forecasting For Businesses

Effective financial planning and forecasting are essential components of any successful business strategy.

Business owners, entrepreneurs, and others can confidently plan for their financial future and achieve long-term success by analyzing past performance and projecting future outcomes.

What Are Financial Plans?

Financial plan examples.

• Financial overview of the company.
• Financial assumptions–all financial projections for business plan guidelines depend on realistic assumptions supporting a financial plan's values. You create assumptions based on credible resources and information.
• Key financial indicators and ratios–in this section, businesses highlight indicators and ratios taken from financial statements to better understand their financial position and health. This section can include factors like working capital and operations, liquidity, debt, and profitability ratios.
• Break-even analysis. This section explains the number of units a company will need to sell to cover future expenses and make a profit. It includes details for a company's variable and fixed costs.
• Financial statements. This section details a company's profit and loss and cash flow statements , allowing for financial modeling to calculate future cash flows.
• Balance sheet. Finally, a financial plan includes a projected balance sheet statement detailing how a business will manage its assets, such as its receivables and inventory.

Financial Planning Methods

• Cash flow-based planning: This method describes a financial planning tool where organizations determine potential income, allocate budgets, and plan for upcoming changes in expenses and income.
• Goal-based planning: A goal-based financial plan outlines how a company will achieve specific financial goals based on its current assets, savings, and future aspirations.

What Is A Financial Forecast?

• how the business performed in previous years
• how companies within the same industry are performing
• the current economic state
• the demand level
• future possibilities
• Fixed costs that are unlikely to change
• Variable costs , including utilities, supplies, wages, and additional resources that businesses need to estimate costs for upcoming periods
• Collecting past financial statements and historical data, including revenue, losses, investments, equity, liabilities, expenditures, income, earnings, and fixed costs.
• A financial forecast method, either qualitative or quantitative
• Frequent analysis of up-to-date financial data

Financial Forecasting Examples

Financial forecasting methods.

• Percent of sales forecasting
• Straight line forecasting
• Moving averages
• Simple linear regression
• Multiple linear regression
• Delphi method
• Market research
• Historical data financial forecasting
• Sales forecasting methodologies
• Cash flow financial forecasting
• tools that analyze customer buying patterns
• machine learning technology
• fraud detection software
• customer relationship management (CRM)
• customer segmentation

Financial Planning vs. Forecasting

Forecasting is a part of financial planning, advantages of financial planning and forecasting.

• Creates a foundation for businesses to understand demand fluctuations and market influences that could impact the cost of goods sold
• Helps companies to reduce financial risk
• It helps make reasonable budgeting decisions.
• It helps raise awareness within a company for numerous external and internal factors.
• Provides insights for future financial decisions
• Helps organizations prepare for worst and best-case scenarios while navigating an uncertain, fluctuating market
• Allows businesses to prepare for predictable economic changes
• Provides essential information for potential financial emergencies so companies have a deeper understanding of navigating these situations
• Ensures financial security for companies in the future
• Sets a company's performance standards
• Helps businesses create actionable and practical goals to foster growth
• Offers a guide for essential financial decision-making
• Improves financial outcomes

Key Steps For Successful Financial Planning And Forecasting In Business

Create detailed budgets, set realistic goals, conduct swot analysis, monitor and adjust, strengthen your business and your finances with camino financial, related articles.

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Methods of financial forecasting explained

Businesses can’t gaze into a crystal ball to see the future. 

But they can turn to methods of financial forecasting to help offset pressure, plan critical strategies, and more - even the introduction of helpful solutions such as  asset finance  in the future.

According to  Forbes’ Business Council,  “without any sound financial projections, any business plan is merely conceptual” - making them an essential planning tool for any SME.

Tackling the financial aspects of any business plan can feel daunting. But when you’re faced with uncertainty, financial forecasting can help you feel more in control of your market and operations. 

These critically useful predictions keep your business clear of any potential influences, so you can effectively ‘future-proof’ your finances for optimal performance. 

In this guide, experts here at Time Finance will provide a concise overview of financial forecasting and its most useful techniques. By the end, you should be familiar with the main methods, so you can confidently introduce forecasting into your financial plans. 

At a glance, we’ll cover:

• What financial forecasting is
• How important it can be for SMEs
• The main methods and techniques
• Budgeting, projecting, and forecasting
• How Time Finance can help your financial plans now and in the future

If your business is thinking of taking on an alternative financial solution ahead of your forecasts - or as a result of one - we can help. 

Our finance solutions help alleviate stress or open exciting avenues for your business, through working capital injections, asset acquisitions, and much more. 

To find out more about our range of flexible finance options and how they could benefit your business,  get in touch with our dedicated team today .

What’s the definition of financial forecasting?

When it comes to determining future business performance, financial forecasts are performed to help you make clear and informed decisions. 

Analysing the past performance of the company, current business trends, and other relevant factors are just some of the factors that can go into your financial forecasting strategy.

Forecasting not only helps companies address business issues and capture opportunities, but also provides a shorter feedback loop, so you can:

• Spot new gaps in the market and launch new services
• Manage rising costs 
• Improve and manage cash flow
• Deliver or reposition a business strategy

Financial plan vs. forecast

A  financial plan  is a strategic way of looking at finances - one that marks out a path that your business should stick to. A   financial forecast  is an estimate of future outcomes. 

These are created through several methods, including using statistics and solid data to make projections, rather than creating suggestions. 

Although a forecast can be used to support a plan, it’s important to note that these are not interchangeable terms. 

Who can utilise forecasting techniques? 

Every business will want to know what to expect in the future.

So to help you plan ahead, regular financial forecasting can give you sound and solid predictions of trends, demands and more - whether you’re an SME or even a larger-scale company. 

Financial forecasts can give everyone within your company the foresight to make strategic choices. 

These techniques can help you cope with multiple issues, such as seasonality, demand changes, price-cuts and competitive retailing choices, strikes and economic shifts. 

They can also support operational functions - especially for business owners who work closely with sales and their ‘ground floor’ levels. 

Ed Rimmer, CEO of Time Finance said, “Financial forecasting and planning gives you the opportunity to quickly optimise channel plans, promotion, pricing levels and even spend on marketing activities - using demand and supply dynamics drive growth.

“It gives businesses the chance to spot new opportunities in the future, or safeguard operations in a rapidly changing and competitive environment.”

So, how can you use these methods effectively?

Let’s find out. 

The four methods of financial forecasting

If you’re struggling to choose the best forecasting method for your business, it’s best to start with the following question:

What do you want to forecast and why?

Once you’ve outlined your reasons, start exploring the following methods of financial forecasting.

Sales forecasting

Sales forecasting focuses on the amount of products or services the organisation expects to render within a certain sales period. 

This particular forecasting method has many uses, helping to budget and plan crucial business resources and even production cycles. It can also help companies manage and allocate these materials more efficiently.

Cash flow forecasting

As the name suggests, the process of forecasting cash flow  is all about estimating the flow of funds in and out of the company over a set period. 

Expenses and income are the main factors, helping to identify immediate funding needs and budgeting, as the short-term accuracy of cash flow forecasting is most important.

Budget forecasting

A budget creates a concrete financial guide to help shape your business’ future.

It creates certain expectations about performance and provides a useful ‘yardstick’, determining the ideal outcome of a budget - if everything continues as expected. 

It’s important to note that this method relies on accurate budget data, which in turn, relies on financial forecasting data. 

Income forecasting

Income forecasting takes your business’s past revenue performance and current growth rate, to help chart potential future income.

It’s a crucial part of cash flow and balance sheet forecasting, which can also be used by people across the business such as: 

• Third parties 

For example,  financial providers like ourselves at Time Finance , may use it when processing your applications to help us get a bigger picture of your goals and financial situation. 

Creating a financial forecast for your business

Many integral aspects of your company's current and future operations hinge on the results of your financial forecasts. 

As such, accuracy cannot be overemphasised. To make sure you get it right, our experts have put together a step-by-step guide to financial forecasting. 

Defining the purpose 

First, ask yourself the following questions: 

• What do you hope to learn from the financial forecast? 
• Do you need a solid estimation of how many products or services can be sold?
• Are you aiming to see how the company's current budget will shape its future? 

Financial forecasts should always have a clear purpose, with the needed factors and metrics outlined beforehand. 

Information-gathering

One of the chief components of financial forecasting involves analysing past financial data and historical documents. 

This can be tricky if you are in the early stages of your business with a small paper trail, but relevant records can include: 

• Earnings (complete and split by share)
• Expenses 
• Liabilities 
• Fixed costs
• Investments and equity 
• Expenditures 
• Comprehensive income 

Getting the timing right

Financial forecasts are created to give business owners a glimpse into the company's future - which gives you the power to decide how long or short your timeline needs to be.

These range anywhere between several weeks to several years, but most companies do forecasts for one fiscal year. 

As factors such as business and  market trends  change, so do financial forecasts - which is why it’s important to note that any type of financial forecast is more accurate in the short term.

Examining types of financial forecasts

There are two go-to methods of financial forecasting. 

Each one has different uses with its own benefits and weaknesses, but qualitative forecasting is usually more suitable for startups or smaller businesses that might not have a wealth of data to rely on.

Quantitative forecasting 

This method utilises historical information and data to pick out trends, reliable patterns and other identifiable factors in your business’ past documents. It focuses on ‘concrete’ data.

Qualitative forecasting 

On the other hand, qualitative methods rely on expert opinions and reports about the company and market as a whole. 

Keep an eye out for your results

As financial forecasts are subject to change over a period of time, you should make sure you keep an eye on your results. 

Take care to document and monitor after any big internal and external developments (an automated software might be able to help with this) - as your forecasts will require an update after each one in order to remain accurate. 

Analyse the data

Regularly checking and analysing your data is the best way to tell whether your financial forecasts are accurate. 

As such, maintaining financial analysis and management can help you prepare for the next financial forecast, while giving you fresh and useful insights into your business’s current performance. 

Rinse and repeat

As businesses should carry out regular forecasting to get a better overview of their finances, making sure the process is repeated in the long run is advisable. This can help you get a rolling forecast into the future, especially after your current one elapses, so your business can stay on top form. 

Ed Rimmer, CEO of Time Finance adds, “It's also smart to carry on collecting, noting, and analysing useful data to improve your financial forecasts' accuracy along the way.”

Improve your cash flow with finance solutions from Time Finance

The Time Finance team has  years of shared experience working with businesses of all sizes  and from a wide range of industries to provide reliable and effective business finance solutions that prioritise their cash flow management needs.

We pride ourselves on our  relationship-driven approach , taking the time to get to know each of our clients on a deeper level to ensure we're delivering the best solutions for them.

To find out more about how Time Finance can support you and your business with a variety of solutions,   get in touch today .

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• Key Differences

Know the Differences & Comparisons

Difference Between Forecasting and Planning

Planning and forecasting are two important managerial functions that are relevant for other functions. Basically, forecasting talks about what could practically happen, depending on the company’s performance in the past and at present. On the contrary, planning implies thinking before acting, i.e. deciding today, what is to be done tomorrow. This article makes an attempt to clear the differences between forecasting and planning.

Content: Forecasting Vs Planning

Comparison chart, definition of forecasting.

Forecasting is used to mean the analysis and elucidation of a future state, concerning the operations of the undertaking. It is a process that takes into account past and present information and facts to anticipate future events. Simply put, forecasting refers to looking forward and predetermine future trends and events, along with their impact on the business organization.

Forecasting is performed by managers working at various levels, however, sometimes experts like analysts, economists and statisticians are employed by the firm for making forecasts. There are two methods of forecasting:

• Time Series Analysis
• Extrapolation
• Econometric Analysis
• Regression Analysis
• Delphi Method
• Consumer Surveys
• Executive Opinion

There is no forecasting technique, that can predict the future course of events with 100% accuracy, i.e. some amount of guess is always present in it, and so, the error might occur.

Definition of Planning

Planning may be defined as a basic managerial activity, that decides beforehand, what, how and when something is to be done. It refers to designing a future course of action, which focuses on reaching desired ends for the undertaking. It is a goal-oriented, intellectual, and all-pervasive activity.

Planning links the firm with its future environment, as it bridges the gap between present and future. It implies:

• Ascertaining future action and
• Making provisions to achieve the same.

Planning is a process in which pertinent information and facts are gathered and analyzed, to make assumptions and premises for future. Considering these assumptions and premises, a plan of action is formulated, for achieving the goal of the organization.

In short, planning refers to looking ahead and taking a peep into future, so as to highlight approximate events, with a little bit of discreteness. The process helps firms to match their resources, with the objectives and opportunities.

Key Differences Between Forecasting and Planning

The main points of difference between forecasting and planning are depicted below:

• A process of thinking in advance the future course of action for the firm and also for various other units, within it, is called as planning. Unlike, forecasting implies predicting future performance of the enterprise, taking into account past and current performance and facts.
• Forecasting relies on postulations and assumption, which involves a certain degree of guess and so the possibility of error can’t be removed entirely. On the other hand, planning is based on relevant information, forecasts, and objectives.
• Forecasting is related to predicting the future course of event or trend. As against this, planning is associated with assessing the future action and making provisions to reach the same.
• Forecasting takes into account facts with reference to the past and present performance of the entity. In contrast, planning considers past and present data and facts, as well as aspirations, to decide beforehand the future course of action.
• Forecasting activity is performed by different levels of managers, or sometimes experts, like statistician, analysts, and economist are employed by the management. Conversely, it is the responsibility of the top-level managers to formulate plans for the business.

On the basis of past and present performance of the firm, revenue can be estimated as:

So, the forecast for the next financial year is Rs. 3 crores which is nothing but an estimate, that the company might achieve. On the other hand, the company plans to achieve Rs. 3.50 crores, in the next financial year, that is based on forecast and aspirations.

Planning and Forecasting, both require abilities like reflective thinking, farsightedness, decision making, experience, and imagination, on the part of managers, in order to perform the difficult task effectively and efficiently. Forecasting has a great role to play in the process of planning as the planning premises rely on forecasts.

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Business plan vs. forecast vs. budget.

Is your head spinning from all the stress & time spent on business plans, forecasts and budgets?  Remember,   planning is not a science…it’s an exercise…that should refresh you, keep you agile, and make you feel in control of your destiny!    Is that how you feel?     As we enter into this year’s budget and forecast season, try to   challenge yourself and your team to become more efficient and to create better standards for planning and budgeting.  In turn, you will be less likely to reinvent the wheel each year.  This article is a practical overview of each process (Business Planning, Forecasting & Budgeting), how to connect them, and have them add value to your business.

So why is planning so stressful?  Take a look what a planning calendar can look like: February-April prepare business plan, July-September prepare forecast, October-November prepare Budget, Feb start over again.  The larger the company, the more planning that takes place.  People get nervous about the process, don’t know where to start, fear they will be judged, and think a lot of time is wasted.  In small companies planning often gets overlooked because of time constraints or lack of interest.  If you understand the differences between each planning tool, the impact they have on one another, and on your business, you will be more inclined to use the information properly.  Here is an overview of how to control the planning exercise and get the most out of it.

What is a Business Plan?

A   business plan   is a written description of your strategy going forward.  It outlines the direction of your overall business and each function of the business supporting that overall direction.  It details market share changes & assumptions that are charted out over the time period such as economic assumptions, competitors, pricing, costing assumptions, new product releases, retired product plans, new facilities, reductions in some areas and investment plans in others. 

When creating a business plan you need to understand where your company is today, and where you want it to be during a time period, in one year, two years, three years.  Also, what happens to the market around you when you make your changes, how will the market/competitors react, what are the anticipated risks?

The benefit of a business plan is to get everyone on the same page as to where the company is going.  It shapes all the decisions going forward; a litmus test for decision making and planning.  It is also a good reference point for assumptions.  If assumptions change, so should the business plan. 

The problem with business plans is when they remain static documents; they shouldn't be.  They should be updated throughout the year, just like a budget-to-actual analysis.  Things change and evolve, so should your litmus test. Always maintain a record and comparison versus the original to maintain as a “baseline” so that you can evaluate your assumptions and take away lessons learned for the next business cycle.

Your business plan should be communicated throughout your organization.  You do not need to share   all   of the details, especially if there are workforce reductions or other sensitive assumptions.  However, you should take a broad view of the business plan and share it.

Share the vision: where are you today, where do you plan to be

Share the mission: macro scope actions the company must to take to get there

Share the expectations: quarterly or other time frames to accomplish the mission

What is a Forecast?

A forecast is financial trend that mirrors the business plan period.  If you develop a five-year business plan, you should create a five-year forecast.  Forecasts should be rolling.  That means each month they should be updated (actual data replacing estimates).  Forecasts should be fluid, linked to changes in the business plan. Forecasts should be updated each year, not reinvented.  Current year forecast should represent a macro level budget.  Forecasts should be macro product line level, not SKU/Customer level..  The basic components of a forecast are sales, costs and investments….in that order.  Don’t forget to estimate personnel required to deliver the volumes in the plan as part of your costs.

Sales Forecast

In a spreadsheet list each product line.  Add last year’s actuals by month for volume, price and revenue.  Project current year results by month using actuals that exist and projections for each month going forward. Do the same for the next two to four years.  Each year determine and incorporate the following assumptions:

Value of the dollar over each year.  It is fine to assume no change for the sake of planning, but state that is the case.

New product lines coming on line

Old product lines going away

Pricing strategy

Key account strategy…accounts you are targeting for growth and those you may walk away from.

You should try to transition low margin business for new higher margin accounts.

You should have a baseline conservative projection in line with your business plan strategy, and then a second line that accounts for risk and opportunity.  This is important to determine what investments you   NEED , and which ones may be necessary.  It is easier to get funding for non-budgeted investments if they are based on exceptional growth.

There is no science here…if you can explain blips and dips in the previous year, you can project or eliminate them in future years.

Your forecast should not look like a hockey stick…conservative first year then dramatic growth the following years.  By having a realistic story and a separate story for risk and opportunity, you can create a real document that your company can use. 

Costs & Investments

Once the sales forecast is complete, the operations group evaluates the sales volumes, determines any investments that need to be made to meet volumes or new products.  They determine directional estimates on raw materials, and workforce requirements.  Once complete the accounting team takes this information and builds the forecast model, determining projected profits and losses.  Consider the following assumptions:

Are facility expansions or capital equipment expenditures required?

What inventory levels will be necessary for the plan, are they different than previous years?  Is more space required, less space?

Anticipate cost reductions due to production & logistics efficiencies; incorporate efficiency programs into the plan.

Be realistic in your assumptions, not too conservative on costs.  Your objective is to reduce overall costs and improve efficiencies.  If they remain the same over time you should be prepared to explain the assumptions that raw materials are going up but your programs are maintaining cost levels…what are those programs and what time periods will they be impacting the plan.

Be sure to incorporate any marketing plans into your cost structure.  Will there be new packaging, new services, etc.…

What is a Budget?

A budget is a micro level analysis of the upcoming year.  You typically finalize the budget by November if you are planning a calendar year budget (Jan-Dec).  In comparison to the product line level forecast, a budget breaks the numbers down to the customer and product SKU level.  Your budget should mirror year one of your forecast.  If something changes during this process and the totals differ…take the time and update your forecast while the information and rational is fresh in your mind.  Otherwise you run the risk of starting over again next year.  Everything should be linked, and changes should be made consistently.  Here are some things to consider for your budget process:

• Consider your time frame for: personnel additions, new customers coming on line, and cost changes.
• Do you plan any price increases or cuts?  Your timing should line up with profit adjustments.
• Do you have purchasing contracts in place?  Try to settle these prior to finalizing your budget.  The more accurate the data, the better.
• Can you negotiate sales contracts with key accounts prior to the budget process in order to reduce price and volume risk?
• All departments of the organization incorporate their spending assumptions in the budget process.  Use current year actuals as a base, then justify increases or decreases each month, taking into account any explanation for dips and peaks that occurred in the current year.
• Make sure your budget is also a rolling document.  Every month, as you start, and throughout the year, it should be updated with actual results (on a separate line).  Do not forget your budget assumptions…learn from them and compare your actual to budget figures.  What changed, and do these changes impact future months?

Whether your are leading an organization, managing a department, or providing an individual contribution to the planning, forecasting or budgeting process…you should have an understanding of the big picture and how things relate to one another. 

Here are some final   DO's   and   DON'Ts  of planning exercises:

DO use old information to plan for the future.

DON'T forget to account for dips and peaks in the past… make a decision   to either incorporate them or not into future planning.

DO tell as story with your data.  You should add comments to your spreadsheets.

DON'T forget why you put figures into your planning, or where they came from.

DO account for rainy day funds, miscellaneous costs & margin of error.

DON'T hide this information in your figures, put it a separate line that is visible.   If everyone hides extras/padding, the entire budget will be skewed and this could make for bad business decisions.

DO be honest, direct & candid throughout all aspects of planning exercises.  If you are leading the exercise, create an environment where people can be honest with you.

DON'T create a useless document that brings no value to the business besides looking good during a presentation….followed by endless explanations for failure throughout the year.

DO create and include a tactical plan into your figures that is linked with the business plan mission.  What are you doing to achieve the mission on time?  What are the costs associated and the cost reductions/new business results that are generated from your efforts?

DON'T separate the business plan from the forecast or the budget.  Always revisit, revise and learn.

DO communicate, communicate, communicate, the plans and the results, as well as the story of what the company is learning from the process.

DON'T create documents that get put away until they are reinvented the next year.

It really does help to take a full picture view of planning, have a well rounded understanding of your business and the needs of each functional area.  Understand how things connect, and how together, they can make the company stronger and more agile.  If your business is a service provider, or a project management entity, these principles still apply.  The difference is that instead of calculating volumes & pricing, you calculate timing and cash flows.

Think about your own planning experiences.  Does your company do a good job?  Do you feel like a part of the process, or just a micro contributor?  Consider using this training article in your organization to get everyone on the same page, working together with the same direction and purpose.

If you are looking for a business plan template, ManagingAmericans.com has one avalilable.  Use this   t emplate   and   guidebook   to organize your thoughts and develop insight into important areas you may not have even considered.

If you haven’t done so already, please j oin our community  to receive professional development updates from experts who are here to help you grow, learn, and experience professional success.

Written by  Lisa Woods ,  President & CEO ManagingAmericans.com

Lisa, a thought leader in Business Management and Leadership, founded ManagingAmericans.com in 2011 after 20+ years successfully leading and driving growth in the corporate world. Her objective is to help mentor and develop professionals to be better leaders, managers, team players and individual contributors in a “do-it-yourself” learning environment using unique & practical tools to support the process. Lisa’s career spans from Global Sales & Marketing to General Management of Multinational Conglomerates. Today she continues to consult small business owners through her private practice. Lisa's publications include: • 4 Essential Skills for Leaders, Managers & High Potentials © 2013 • The Cross Functional Business: Beyond Teams © 2015 • Action Item List: Drive Your Team With One Simple Tool © 2016 • Small Business Planning Made Simple: What To Consider Before You Invest © 2017

Do you have a question for Lisa?  Please visit our Executive Leadership Community , she will be happy to help:  Ask an Expert

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Client management

Predicting business expenses: How to forecast accounts payable

“Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most.”  ~Peter Drucker, management consultant, educator, and a leading voice in modern project management theory

No matter what type of business you run, you can’t do it successfully without having a handle on your cash flow.

At least not for very long.

One of the troublesome parts of dealing with balance sheets and working capital is that expenses are unpredictable, especially if your organization is in a growth phase. Your day-to-day expenses don’t occur evenly, and even if they did, bills don’t come in or come due at even increments. 

Not to mention, you’re facing the same issue on the other end, with clients that pay with varying degrees of timeliness.

Accounts payable forecasting is the practice of predicting at least one side of that equation: the money you’ll owe in the coming months. 

Here’s what you need to know about getting started with forecasting accounts payable.

What are accounts payable?  

Accounts payable (AP) is a term for all the money a company owes to others for goods and services the company has already received. These are debts that must be repaid relatively quickly, usually within 90 days. Bills from vendors, freelancers, and suppliers are all part of AP.

Businesses use AP to understand their expenses (specifically what money is already promised to go out the door) more clearly, enhancing decision-making and financial planning. It’s an oversimplification to say, “you can’t spend money you don’t have.” But at some level, it’s true — spend money you owe vendors on your own office renovation, and you’ll find yourself in an uncomfortable position.

Think of AP like a more complex version of a personal credit card. Each month you receive a statement showing how much you owe and a due date that tells you when to pay to avoid penalties (interest and fees).

With AP, the challenge is that no one else is collecting the “credit card charges” — your business has to do that on its own. As an added layer of complexity, you’ll often have to deal with varying due dates, too.

Just like keeping on top of your credit card payments helps your overall financial health and keeps you from getting into financial hot water, accurately tracking your agency’s AP is essential for managing cash flow, avoiding disruptions, and maintaining vendor relationships.

• The basics of forecasting

Accounts payable forecasting is a financial planning process that predicts and plans for near-term expenses. This financial modeling tool measures your current liabilities and paints a part of the picture of your future cash flows.

It’s similar to budgeting for future needs at home. For example, if you know your car needs new tires, you can plan for the expense by making budget adjustments for a couple of months prior. If you wait until you get in an accident because your worn-out tire blows out on the interstate, your expenses will be much higher — and unplanned.

AP forecasting is the business equivalent of planning for that tire replacement (and the rest of your month-to-month and one-time expenses). 

To forecast project expenses well, a business needs linear, scheduled, and repeatable processes. Include at least the following steps in your process:

Collect historical data

Most business expenses are cyclical. Even if they don’t come due every month, they aren’t completely random. For example, you might not know exactly when you’ll need to pull in a specialist freelancer, but you already have a pretty good idea that you’ll do so three or four times in the coming year.

If you’re collecting and using historical data, that is.

Some AP forecasting trends might not be front of mind and might not show up in consistent or identical patterns, but they’re still predictable if you look more closely at historical data.

Where do you get this data? If your organization uses accounting software or works with an external accounting partner, that’s a great place to start! If you’re tracking AP and accounts receivable (AR) in another location or document, dive into the data there.

Analyze spending patterns

Take a closer look at your current spending patterns. If you aren’t categorizing expenses, it’s wise to start doing so.

Refer back to that specialist freelancer. Maybe you use quite a few of them for various specialties or verticals, and it’s a little daunting to pull individual invoices and receipts. If you’re categorizing those expenses properly, you’ll be able to quickly isolate all freelancer expenses. 

Take Google Ads as another example. Some businesses buy these for their customers, but it’s not a real “expense” in the sense the customer pays for them as part of their broader contract. Being able to quickly identify all such expenses via categorization helps maintain clear thinking about expenses and income. 

Consider external factors

Does the industry you serve experience heavy seasonality? If so, your clients may pay a flat monthly rate while your actual expenses ebb and flow with their seasonality. Market conditions can also factor into cash flow forecasting: inflation, changes in an industry, and so on.

Implement a review process

Don’t assume your AP forecasting process is perfect. (Because it will never be perfect!)

Make sure to create and implement a review process that evaluates your AP forecasting against actual AP. Where it’s not lining up, identify what adjustments you need to make to your formulas. 

One more note: A conservative estimate is better than a hopeful one. AP and AR forecasting shouldn’t be what you’re hoping to be paid and what you’re hoping to owe. Instead, use a conservative, realistic estimate of what is most likely to happen.

• Accounts payable vs. accounts receivable: What’s the difference?

Businesses rarely track AP alone. They track it alongside accounts receivable (AR), which is the amount of money that others owe to the company. AP is your outflows, money that will be going out . AR is money that will be coming in (inflow).

Both of these elements (among many others, like current assets, liabilities, and liquidity) will be included in an organization’s financial statements. Keep the two terms straight by remembering this:

P/Pay/Payable = Bills to pay

R/Receive/Receivable = Money you’ll receive

Let’s examine these concepts in more detail.

Accounts payable

Accounts payable refers to any outstanding bills for goods or services already delivered that will be due in the near term. It’s money you’ve already committed to spend, which is why businesses use accounts payable as they forecast resource costs .

Accounts receivable

Accounts receivable refers to any outstanding source of income for goods or services you’ve already delivered to others (such as invoices that you’ve sent to clients for completed work, but that clients haven’t paid yet). It’s money your customers or clients have already committed to pay you, but hasn’t hit your bank account yet.

• Accounts payable formulas

There are already several established accounts payable formulas out there. Businesses use one or more of them to forecast AP. Which one is right for you depends on the types of clients you serve and the specifics of your financial situation.

Historical trend analysis

The formula for historical trend analysis looks like this:

Current amount - base/previous amount = change in amount

To turn that into a percentage, divide the answer by the base year/previous amount.

Using this formula, you can track changes over time, either by percentage or in real numbers. You might use this to compare AP and AR over time to project future trajectory or identify past seasonality.

Regression analysis

Regression analysis compares a dependent variable and an independent one and can be used in AP forecasting to identify what a specific change is likely to do to another aspect of the business.

A simple linear regression looks like this:

Y = a + bX + ϵ

And a typical regression analysis extends out to this:

Y = a + bX + cX + dX + ϵ

(Courtesy of the Corporate Finance Institute )

Cash conversion cycles (CCC)

CCC is calculated by adding days inventory outstanding (DIO) and days sales outstanding (DSO), then subtracting days payable outstanding (DPO). In a formula:

CCC = DIO + DSO - DPO

This formula measures how long it takes for goods (or services) to turn into income, minus how long it takes you to pay your AP. A low figure is usually considered healthy, and if your CCC score starts to rise, it’s wise to investigate why.

Of course, it requires knowing how to calculate the average number of days in your DPO, DSO, and DIO metrics. Here’s a detailed guide.

Simple moving average

The formula for simple moving average (SMA) looks like this:

This formula averages every instance of a figure over a fixed set of periods, such as a 50-day moving average, showing what the average price is during that stretch. It’s useful for comparing volatile figures over time, such as if your AP or payment patterns are spiky, you could measure this element in a three- or four-month rolling average.

Vendor payment policies (2/10 and Net 30)

2/10 Net 30 is a popular policy where payers get a 2% discount if they pay an invoice within 10 days but otherwise have up to 30 days to pay without penalty. Here’s the formula for the 2/10 part of the policy:

x - .02x = y

Where x is the agreed-upon price and y is the discounted price for early payment (within 10 days).

• Best practices for accurate forecasting

Accounts payable forecasting isn’t easy, and it will never be precise. But when you follow best practices for accurate forecasting, you’ll have a much easier time with resource management and understanding your cash flow.

1. Mine historical data

Your historical data should be a gold mine for forecasting, especially once you have data both on what happened (actual) and on your forecasts for that period. (This is one reason to start forecasting today, not next quarter!) 

Look back at periods with sudden expenses. How well did you forecast them? Did your model withstand the spike, or did it punch right through your predictions?

Where you see large variances, look for the “why,” which will often point to what you need to change for next time.

2. Identify patterns

Many unexpected or sudden expenses don’t actually need to be unexpected or sudden.

They’re things that you can plan for. You might not know when you’ll need a new laptop, but you know it will happen sometime between now and the turn of the decade. 

Look at those “sudden” expenses in your historical data and see how many of them were predictable or falling into a pattern. Then, incorporate those elements into your forecasting.

3. Understand the ramifications

Not all late payment penalties are the same. But some will cost you financially. Others will cost you reputationally. As you continue honing your forecasting, start identifying these elements as well, especially if money is tight. Should you need to delay on a line item in your AP, it’s advantageous to know which one will have the least amount of impact (whether financial, relational, or both).

Get a stronger, more robust financial forecast for your business with Teamwork.com

Consistently predicting your business expenses accurately is liberating for businesses: you can operate confidently and spend less time worrying about cash flow, freeing you up to focus on your business’s unique selling proposition and delighting your clients.

Teamwork.com is the ideal platform to run every aspect of client work. With budgeting and forecasting tools, you’ll be able to plan and budget for projects with ease and clarity.

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TABLE OF CONTENTS

• What are accounts payable?

Ben is a Senior Content Marketing Specialist at Teamwork.com. Having held content roles at agencies and SaaS companies for the past 8 years, Ben loves writing about the latest tech trends and work hacks in the agency space.

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NEDA Board to approve revised PGH cancer center plan next week

THE National Economic and Development Authority (NEDA) board is set to approve a revised plan for the Philippine General Hospital (PGH) cancer center next week, addressing changes in project cost and parameters, the Public-Private Partnership (PPP) Center said Thursday.

 “The thing with cancer center is since it was the first approved (PPP project) under the Marcos administration, some of the assumptions were set in the pre-pandemic (period)” PPP Executive Director Ma. Cynthia C. Hernandez told reporters on the sidelines of a luncheon organized by the European Chamber of Commerce of the Philippines.

 The NEDA Board, which is chaired by President Ferdinand R. Marcos, Jr., initially greenlit the project on Feb. 2, 2023.

However, the cost for the 300-bed cancer center was raised to P9.4 billion from P6 billion. This includes the financing, design, engineering, construction, operation, and maintenance of the hospital.

“When they were drafting the detailed terms and conditions, I think PGH realized that they need to substantially upgrade the standards, especially they want it to be world class. So there were adjustments to the project cost which necessitated another round of NEDA (Board) approvals,” Ms. Hernandez said. — Beatriz Marie D. Cruz

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