When discussing business plans and financial projections, the terms planning and forecasting are often used to mean the same thing, however, in order to avoid confusion, it is important to distinguish between the two.
Forecasting
Forecasting is simply the process of estimating the future financial outcome of a business. By considering past and current performance, and any other available information, management can decide what conditions might exist in the future, and what actions it might take, and then using appropriate forecasting techniques, arrive at a realistic forecast for the business over the next few years.
For example, past and current performance might show revenue of 250,000 a year, the business knows that it intends to launch a major advertising campaign next year, and as a result forecasts an increase in revenue of 5% (12,500), giving a revenue forecast of 262,500 for next year.
Where’s the business heading …
Note that forecasting is purely factual, and uses past and current performance and other available information to give an indication of where the business is heading. It takes no account of the aspirations of the business and its management, which is the domain of planning.
Planning
Planning takes into account the aspirations of the business and its management. The business used in the example above might for instance, set itself a target for next year of increasing revenue by 20% to 300,000. This is an aspiration of the business and is not based on current information, which as we have seen above, leads to a forecast revenue of 262,500.
The 300,000 target is in fact a financial budget, it reflects the current intentions and objectives of the business. However, while budgeting is part of planning, it does not in itself show how the target is going to be achieved.
Having set itself an objective of achieving revenue of 300,000, the business now needs to decide on the actions necessary for it to reach its goal, it needs to plan.
Where do we want to go, and how do we get there…
Planning takes many forms, but for our purposes, the most important aspect is business planning. Business planning is the process of deciding on the objectives of the business over the next few years, and outlining the actions necessary achieve these objectives.
Normally, the planning process is set out in a document known as the business plan which, together with the financial projections, helps the management of the business to:
- Think logically and strategically about the business.
- Set objectives and milestones.
- Plan quantity and timing of resources such as staffing levels, marketing effort, and finance.
- Monitor the actual progress of the business in comparison to the plan.
- Communicate its plans to stakeholders such as employees, lenders, and investors
Planning and Forecasting, the Financial Projections Template
The financial projection template can be used either as part of the forecasting process to set out the expected outcome for the business, or as part of the planning process to prepare financial budgets in a business plan document.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.