Financial Planning vs Forecasting: What You Need to Know

Meteorologists rely on tools, technology, and expert analysis in their quest to accurately forecast the weather.

Those forecasts – along with your own experience (and sometimes simply looking out the window) – help you plan whether to pack an umbrella or slather on the sunscreen.

A similar connection exists between financial planning and financial forecasting.

Financial planning is a process of mapping out a step-by-step process to identify how future revenue will be generated and future expenses covered. A good financial plan relies heavily on existing data and historical information to lay out the tactics and activities to achieve organizational goals.

Financial forecasting, meanwhile, draws on analysis of past performance, current industry trends, and informed assumptions with the aim of predicting the most likely outcomes – or obstacles -- moving forward.

While there are clear differences between the purpose of both financial planning and financial forecasting, they often get conflated and are used interchangeably.

That might not seem like a big deal, but it can lead to stormy weather within your organization if key decision-makers don’t fully grasp the distinct roles planning and forecasting play in charting a strong and profitable financial course.

Further, having a clear understanding of the purpose and benefits of both financial forecasting and financial planning helps ensure your finance team is delivering optimal value to your organization.

The Financial Planning and Forecasting Connection

While they serve different roles, financial forecasting and financial planning are deeply intertwined and, in some ways, dependent on one another.

The insights generated from a financial forecast can help guide the creation of a sound financial plan by identifying potential outcomes and risks that could impact and influence that plan.

A financial forecast estimates future revenues, expenses, and other financial metrics to help guide decision-making and strategic planning. And a good forecast also factors in industry, economic, and consumer trends to predict future financial performance.

Generating this forward-looking view helps anticipate potential challenges and offers insight in the best allocation of resources and funding. It also informs more accurate goal setting within a financial plan.

Finance departments now have access to state-of-the-art financial planning and forecasting software for an integrated approach that blends budgeting, planning, and forecasting to set your organization on a promising path forward.

5 Steps to Better Financial Planning

Here’s a closer look at how a sound financial plan is built with the benefit of financial forecasting insights.

1. Set Goals: A key first step to developing a sound financial plan is to focus on goal setting. Setting targets for what you aim to achieve helps provide a clear direction and aligns efforts across the enterprise. Goal settings also help foster collaboration and identify potential risks or opportunities that could factor into achieving those goals.

2. Assess current state: Essential in the financial planning process is to do a detailed assessment of your organization’s current financial situation. Taking a close look at the current state serves as a double-check of budget projections and creates an accurate and up-to-date baseline that can serve as a foundation for financial planning.

3. Check the forecast: This is the stage where financial planning and forecasting intersect. Financial forecasts can help identify potential risks on new opportunities on the horizon that could prompt adjustments to your financial planning. A deep dive into a financial forecast helps ensure that your financial plan considers the full range of factors that can influence activities and outcomes moving forward.

4. Set your strategy: Now you’re in a position to make informed decisions on the strategic elements of a financial plan. This stage allows you to identify specific actions needed to achieve goals. It’s also important to consider certain factors that could impact outcomes, such as market conditions, competitive landscape, and internal capabilities that could necessitate adjusting the plan when it's in flight to account for new realities.

5. Monitor and review: Once your financial plan is set in motion, it’s important to continually monitor and review performance and activities against established goals and benchmarks. The monitor-and-review process should also take into consideration current or updated financial forecasts. This approach allows you to course correct as needed, address challenge areas, and assess if the strategies deployed are generating desired results.

Much like a weather forecast, financial forecasts can help your organization identify and prepare for what the future likely holds. Just know there may be times in which an unexpected downpour requires you to adjust accordingly.

With a good financial plan in place – informed by effective forecasting – you can put your organization in a position to thrive through ever-changing conditions.