What Is Financial Planning, Budgeting, and Forecasting (PBF)? Your Guide to How to Do It

If you’re involved in financial planning, budgeting, and forecasting for your organization, you know how difficult—and thankless—your job can be. The responsibilities can feel endless, from planning next year’s budget to ensuring C-suite executives don’t submit questionable expense claims.

Managing the financial aspects of a business is crucial to its success, requiring attention to overheads, salaries, and profitability. Financial planning, budgeting, and forecasting are the backbone of these efforts, and we’re here to guide you through the tasks and tools needed to handle them efficiently.

Table of Contents

• What Is Planning, Budgeting and Forecasting (PBF)?
• Differences Between Planning, Budgeting and Forecasting
• How Planning, Budgeting, and Forecasting Work Together
• Why Business Planning, Budgeting, and Forecasting Is Important
• A Step-By-Step Guide to the Planning, Budgeting and Forecasting Process
• Planning, Budgeting, and Forecasting Examples
• The Future of Planning, Budgeting and Forecasting
• Common Challenges With PBF
• Planning, Budgeting, and Forecasting Best Practices
• How Financial Planning, Budgeting, and Forecasting Solutions Can Help
• How to Pick the Right Strategic Planning, Budgeting, and Forecasting Solution For Your Business
• Map Out Your Financial Goals With a Unified Platform For Planning, Budgeting and Forecasting
• FAQs About Planning, Budgeting and Forecasting

What Is Planning, Budgeting, and Forecasting (PBF)?

Financial planning, budgeting, and forecasting (PBF) lie at the heart of every business. They cover everything from setting short-term and long-term goals to allocating resources to making informed business decisions based on data and the stories it tells you.

An effective PBF strategy can give an organization a competitive edge in a crowded marketplace and provide you with better financial reporting and sound financial health. Careful financial planning and analysis can be the factor that helps a business grow.

Planning

Financial planning can decide the business’s financial direction and strongly affect operations. Many organizations will look to a long-term financial model, usually three to five years, and that model can affect everyone in the company.

Budgeting

This may be the most important factor in your PBF strategy and breaks down your financial plan into a month-by-month roadmap. It covers both outgoings and income as books need to be balanced.

You’ll also look at debt reduction plans if you have any outstanding debts. While it may be part of a longer-term plan, budgets are usually set for the financial year ahead.

Forecasting

Forecasting uses historical data analytics combined with current market trends to predict what may happen in a given time period. This enables businesses to make various decisions regarding product lines and marketing for that period.

Any forecast can be adjusted in real time if predicted patterns or trends don’t happen or differ slightly.

Differences Between Planning, Budgeting and Forecasting

Understanding the differences between planning, budgeting, and forecasting is crucial for effective financial management. Below is a comparison table highlighting the key distinctions between these three processes.

How Planning, Budgeting, and Forecasting Work Together

You can think of Planning, Budgeting and Forecasting as the three fates of business, though destiny is not inescapable in this case. Planning is your long-term road map that sets goals for your business. Examples of goals you might set include increasing your revenue or entering new markets.

It also identifies potential obstacles, such as economic downturns that could affect spending levels.

Financial forecasting then looks at what might happen in the coming year, using your historical data (and that of your market) to predict what products might be big sellers and what products may be losing you money through warehousing costs.

The financial analytics aspect of forecasting can be a major part of your plans. 

Budgeting sets out your spending levels for the coming year. It will take into account your long-term business strategy, as well as the results of predictive forecasting.

Of course, it will look to balance the books and ensure that expenditure is less than revenue, but that’s not always possible.

When these three tasks are combined, they can help your business deal with any upcoming issues.

Why Business Planning, Budgeting, and Forecasting Is Important

Having a robust PBF strategy is crucial for any business. It can mean that your financial reports are more accurate (something shareholders and executives love) and can help improve your business-related analytics.

In turn, this can mean your forecasting is more accurate, which can stimulate business growth.

Combining data analytics with best practices in planning and forecasting means you can align your business goals with what you do daily. Having an effective PBF strategy can bring you many benefits. It will enable you to:

1. Update your plans and forecasts in real time to deal with new threats or opportunities.
2. Track the progress of short-term and long-term goals and analyze any changes as they happen.
3. Establish a strong relationship between operations and finances.
4. Predict both cash flow and expenditure.
5. Foster collaboration between relevant stakeholders.
6. Establish contingency plans for unexpected crises.
7. Track progress toward goals and any deviation from your roadmap that may require interventions.
8. Design a budget that nurtures growth while avoiding financial problems.
9. Manage your sales pipelines and your marketing strategies more effectively.
10. Make data-driven decisions.
11. Have more accurate financial reports and other evidence of progress if you need to approach financial institutions or investors.

A Step-By-Step Guide to the Planning, Budgeting, and Forecasting Process

You might find things a little confusing if you’re just embarking on the PBF journey. You understand the separate concepts and how they interlink, but you might not know how to tie them together.

This guide will show you how the process works.

1. Understand the Strategic Plan

The foundation of your PBF process lies in your strategic plan. As mentioned earlier, this is usually a long-term plan of three to five years. It identifies your long-term goals, such as revenue or business growth and links to proposed budgets and contributory factors to achieving them.

Your plan should also align with your corporate performance management (CPM) system, which can help you manage performance across your organization.

2. Budget Allocation

Allocating budgets can often be complicated. You need to consider many different factors before making a final decision.

• Projected Income: How much revenue does your business expect in the coming fiscal year? You calculate this using historical data (income in previous years), market trends, and revenue forecasts.
• Discount Method: With this method, you calculate the expected revenue from each income source and then multiply it by the income probability percentage.
  For example, if one source showed a projected revenue of $100,000 and has a 75% chance of achieving that again, then you’d adjust the figure to $75,000.
• Cutoff Method: This method multiplies that anticipated income figure by your overall probability estimate. Using the same example figure, if you anticipate an 80% success rate for that income stream, you’d adjust the figure to $80,000.
• Project Expenses: These are the expenses associated with individual projects. For example, if you were implementing a project to incorporate AI in finance systems, you might have project expenses of $75,000. 

3. Forecast Revenue and Expenses

For this, you use analysis of the market, your historical data from previous years, any identified trends in your sector, and any changes to your sales and marketing strategies.

This lets you forecast how much revenue your business can expect in the coming year.

For expenses, you’ll have a mix of fixed and variable costs.

Fixed costs can include mortgage payments on your factory or shop and payments due to financial institutions as part of a debt reduction plan.

Variable costs can include things like your utilities and some elements of your labor costs.

4. Define and Measure Key Performance Indicators (KPIs)

To track the progress of your PBF strategy, you need to define what metrics you’ll use. These will vary according to your business type, but common ones are net profit margin, burn rate, budget variance, inventory turnover, and customer acquisition cost to lifetime value (CAC to LTV) ratio.

5. Establish Monitoring Systems

With all those different areas to keep an eye on, you need an efficient system (or systems) to keep track of everything from labor costs to inventory management. Try to find the best tools for each task, such as OneStream’s tools, that help with budgeting, forecasting, and the planning process.

6. Stakeholder Engagement

Financial planning and analysis and other areas of your PBF strategy don’t exist in a vacuum. You need to engage with all relevant stakeholders who can contribute to every aspect of your PBF plan.

For example, the marketing director/manager will have the best idea of what budget they might need, while the sales manager will have input on expected sales performance.

7. Scenario Planning

What happens if circumstances change? You need contingency plans for different scenarios. OneStream offers AI-powered scenario planning, which means you can identify what may go wrong and implement contingency plans that will mitigate any adverse effects.

8. Evaluating and Implementing PFB Software

You need to first identify what functions and features you want from the PFB software you choose. Some of those features may be particular to your business type.

Ideally, you want a solution that integrates with your existing tools, such as Excel. You also want to choose a solution that doesn’t disrupt your infrastructure during implementation.

9. Continuous Review and Adjustment

Your plan and process may not be perfect the first time. As with any strategy, you need to review your decisions, and how much progress has been achieved (and how closely any progress aligns with your goals). If things aren’t working quite right, then make adjustments.

Planning, Budgeting, and Forecasting Examples

Example 1

An e-commerce business has set a revenue goal of $15 million for the next financial year. Using a PBF plan, they identify the percentage increase they need in sales while maintaining the current level of expenditure.

Example 2

A bookstore chain has set expansion into new markets as its five-year goal. Their PBF software has helped them set budgets for marketing in those markets to increase awareness of their brand.

Then, they use forecasting to identify the potential revenue from those new markets.

The Future of Planning, Budgeting, and Forecasting

As with other technologies and processes, PBF constantly evolves with new ideas and tech. Perhaps the most important emerging thing is the increasing use of AI and ML (machine learning).

Because these offer far quicker and more accurate data analytics, they’re something that’s being embraced by many businesses.

Some of the main developments you may see in the PBF field include:

• Increased collaboration between teams and departments.
• Integration with other essential business processes, such as inventory or supply chain management.
• More emphasis on scenario modeling and planning.
• An increase in the number of cloud-based solutions being used.
• More use of AI and ML.
• Closer collaboration between financial and operational planning.

Common Challenges with Planning, Budgeting and Forecasting

Every system or process presents challenges, as well as offering benefits. And as in other areas, knowing the most common challenges makes them easier to overcome.

Let’s look at some of the challenges you may encounter.

• Collaboration: An effective PBF process requires collaboration between all relevant stakeholders, which can present a significant hurdle in larger enterprises. You need to ensure that all stakeholders have access to the plan and the numbers and can contribute.
• Time: All areas of corporate performance management, including PBF, don’t happen overnight. You need to allow enough time from the inception of any plan to its execution so that everyone involved can contribute.
• Complexity: Let’s be honest; PBF is not a simple process. You need information from multiple areas, and you need to collect data from multiple sources, both internal and external. You can consider simple explanations of even the most complex areas.
• Accuracy: With so many inputs, maintaining the accuracy of every piece of data can be a real problem. Ensure you check any data and that it’s clean and of the highest quality.

Planning, Budgeting, and Forecasting Best Practices

Along with challenges, there are several best practices you can follow when developing your planning, budgeting, and forecasting process.

To get the most out of your budgeting, planning, and forecasting process, you should:

1. Move Away From Manual Processes: While Excel has its uses, it’s now more than 30 years old and struggles with the enormous amount of data we see today. Manual data entry can mean that the data is outdated by the time you make decisions.
2. Be Flexible: Markets can be volatile, and consumers can often be unpredictable. Rather than having a single linear PBF plan, consider the different scenarios that may arise and plan for them. That can mean adjusting your goals and budget or tweaking forecasts when you have new data.
3. Revisit Forecasts: Your initial forecasts were likely for the year ahead (or even longer in some cases). Flexibility should be carried over into your forecasting process, and you should revisit your figures on a monthly basis as you gain access to new data.
4. Collaborate: You shouldn’t expect your finance team to do all the hard work. Build a framework that allows for collaboration with all the heads of departments in your organization.
5. Be Driver-Based: You may offer multiple products or services, but which ones really drive your business forward? By focusing on them, you can have an integral part in all your planning.
6. Choose the Right System: The right technology can underpin all your efforts and track relevant metrics. Look for success stories, such as this one about Ampleon, where EPM/CPM systems have helped businesses achieve their objectives.

How Software Can Help With PBF

Manual entry spreadsheets are still used by many businesses, but they fall short in many areas of modern business and are also prone to human error. Software solutions can help with the process and offer several benefits.

• Speed: Manual data entry is both slow and prone to errors. Choosing a software solution means that data is being pulled directly from the source, whether it’s a spreadsheet, another tool, or even external sources. This significantly speeds up the process.
• Scalability: One of your ultimate goals is business growth. That may happen slowly or quickly, but regardless of the time, a scalable software solution will grow with you.
• Automation: A software solution will automate many of the time-critical and repetitive processes. You need such processes and data to update regularly, and software and AI-powered systems will help you do that.
• Insights: Imagine, for a moment, a multinational corporation with numerous locations and departments. Spotting patterns or problems in all the data concerning that organization would be almost impossible for a human to do.

A software solution or platform can spot any irregularities (or positive trends) and give you insights that a person would likely miss.

How to Pick the Right Strategic Planning, Budgeting, and Forecasting Solution For Your Business

Choosing the right solution for any process can be a nightmare, and that’s no different when it comes to a PBF system. What features and functionalities should you ensure make it to your shortlist?

Automation

You want a solution that offers a high degree of automation so that processes are speeded up, and the data that’s gathered is more accurate. This not only makes your PBF process quicker but also reduces the likelihood of human error.

Customization

Different businesses have different needs. Ideally, your chosen solution should offer customization options for dashboards and reports.

User-Friendly

This almost goes without saying, but you want a system that’s user-friendly and has an intuitive UI (user interface). This can also help with collaboration when it comes to inputs from different stakeholders.

Integration

You may have many existing tools that you use for areas of your business, from financial forecasting to human resources. The ideal solution will integrate with those tools so you get a 360-degree view.

Modeling

As you have to consider different scenarios that may affect budgeting, forecasting, and planning, you want a solution that can help model different potential scenarios and adjust existing calculations to account for those scenarios.

Security

Data is often your lifeblood and contains a lot of sensitive information. Protecting that information isn’t just important to you. It may be a legal or regulatory requirement.

Ensure your chosen solution has robust security measures, including user permissions, encryption, MFA (multi-factor authentication), and password protection.

Map Out Your Financial Goals With a Unified Platform For Planning, Budgeting, and Forecasting

One thing that may be worrying you is the idea that you’ll need several solutions to effectively implement a PBF process. What if you could do all those different processes on one unified platform?

You can with OneStream. Its unified platform means that companies can do everything from creating a detailed budget to accurate forecasting.

With OneStream’s unified platform gathering and consolidating data from multiple sources, you can be confident in any resulting analysis. It also offers tracking and updates in real time so you can make changes if and when needed.

High levels of automation make processes quicker, and you can gain real insights into every aspect of your processes.

If you’re looking to take your company’s PBF process to the next level, why not get the best solution and request a demo today?

Did you know OneStream also offers a weekly live demo webinar every Friday for 1 hour on a specific topic? Check out our resources library, too.

FAQs About Planning, Budgeting and Forecasting

What Is the Budget Planning Process?

The budget planning process is how a business sets its budgets for the coming year (or other period). It involves looking at previous budgets, historical financial data, and forecasted revenue to allocate a budget to the organization's different areas.

What Are Methods of Budget Forecasting?

They’re the methods used to predict revenue and expenditure for a business. There are four main methods:

• Straight line
• Moving average
• Simple linear regression
• Multiple linear regression

What Is Financial Forecasting?

Financial forecasting is the process businesses use to predict future financial performance, including income and expenditure. It uses a combination of historical data and market trends to guesstimate what the figures will be.

What Is a Budget Forecast?

A budget forecast is a prediction of the outcome of any set budget. It’s a linear projection of what will happen if the conditions of the budget are followed precisely.

How Often Should a Business Update Its PBF Processes?

Ideally, you should revisit your processes on a yearly basis to ensure they’re still accurate and relevant. However, you can revisit some elements as regularly as monthly to track any deviation from your plan or your predictions.