Planning budgeting and forecasting

Post date: Apr 19, 2013 6:08:15 AM

Planning, budgeting and forecasting if considered together is a finance function but when planning alone is considered it may be for many areas and functions, often planning is considered to be management function. First let us look at planning alone:

Planning

Based on level and time span

Focus of planning may be at different level and it can cover different time span. Each with different level of detail and objective.

Strategic plan

To set direction of the organization and path to achieve its objectives as per its vision, organizations make strategic plans. It is based on analysis of where we are right now?, where we want to go/what we want to be? and How to achieve it? There are may approaches to strategic planning: Objective based or vision based, Issue based etc.

Strategic planning process

• • Define/identify mission

  • Define objectives

  • Collect information from environment

  • Define strategy

  • Implement strategy

  • Evaluate success of plan

  • Make corrections using feedback

Long term plan

Long term plan can provide target and actions for 3 to 7 years, even the target span of time may be closer but idea is to look in to near future to achieve strategic goals as mentioned in strategy plan. Long term financial plan sets financial targets for 3 to 7 years.

Yearly plan

Yearly plan is definition of financial targets for next one year and activities to achieve specific milestones derived from long term plan.

Areas of application

• • Financial planning

  • Operational planning

  • Enterprise Architecture planning

  • Project planning

  • Town planning

  • and many more

Planning process

• • Fact collection

  • Analysis of facts

  • Identification of Objectives

  • Identify various options

  • Evaluate options

  • Select best options

  • How to achieve objectives & chosen options

  • Define evaluation criteria

  • Define milestones

  • Define execution steps (plan)

  • Execute the plan

  • Evaluate the plan

Benefits of planning

• • Sets the direction

  • Sets objectives

  • Organize activities

  • Helps managing risks

  • Helps controlling the process and activities

  • Helps in decision process

Budgeting

Budgeting provides base of yearly plan to make sure it should be achieved. It defines what should be the outcome of the plan.

Following are main areas of focus:

• • Sales & Gross Margin Budgets

  • Capital Expenditure Budgets

  • Headcount Budgets

  • Operating Expense Budgets

Forecasting

Forecasting provides projected performance based on current information on perofrmance. Forecasting in financial planning, look at revenue and income.

Approaches

Top-Down

Analysis of current demand and operations based on which projection of revenue in future is defined (next one year or so)

Bottom-Up

Based on current line items details as per revenue budget.

Hybrid

Top-down focus combined with a bottoms-up allocation.