What Is Financial Planning and Forecasting?

Financial planning and forecasting are interrelated financial practices that help a business determine operations, create reasonable expectations, and measure actual performance against set goals. Both financial planning and forecasting are managed on a continual or regular basis, since the constant accumulation of new data can affect long-term strategies and goals. Like the navigational tools on a ship, businesses need good financial planning and forecasting skills in order to orient the organization and set a course for the future.

A broad concept, financial planning covers the whole of a business's financial concerns and operations. Some of the concepts involved in financial planning include budgeting, accounting methods, the creation of sales goals, and financial performance analysis. Since it is such a broad topic, financial planning is often broken down into more manageable divisions, such as short-term, mid-range, and long-term goals. Using these time frames, financial planners help a business set reasonable objectives, incorporate accurate and reliable financial management strategies, and create mechanisms for the analysis of performance against set goals.

Forecasting is an important segment of financial planning. Using historical data and market analysis, forecasting helps a business set reasonable goals for revenue and costs. For an established business, a market forecast will usually consider how the business performed in the last year, how other businesses in the market are performing, the state of the economy, and the level of demand. These factors can then be run through a variety of statistical equations to create a forecast that can be used in financial planning. A cost forecast will consider both fixed costs, such as rent, which are unlikely to change, as well as variable costs, such as wages, utilities, and supplies, to help create an idea of costs for the coming year or set time period.

Financial planning and forecasting are both extremely useful in the creation of an operating budget. While financial planning helps determine the strategies, goals, and operating procedures for a business, forecasting helps determine the likely levels of sales and costs for a given time frame. When combined, financial planning and forecasting allow business owners, shareholders, or board members, to make informed decisions in nearly any financial aspect. For instance, if it is part of the long-term financial plan to give each employee a large bonus when they have worked for ten years, forecasting can work these bonuses into the measurements of cost versus sales, and return an accurate idea of whether the company will be able to afford bonuses in a given year. By creating a system in which financial planning and forecasting are measured and analyzed on a rolling, continuous basis, a business can ensure that it is making financial decisions based on the most up-to-date information.