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Planning, Budgeting, and Forecasting

 Planning, budgeting, and forecasting are often considered together as a finance function. However, when planning is considered separately, it applies to many areas and functions and is often regarded as a management function.

Planning

Based on Level and Time Span

The focus of planning varies by level and time span, each with different levels of detail and objectives.

Strategic Plan

To set the organization's direction and define the path to achieving its objectives in alignment with its vision, organizations develop strategic plans. These plans are based on an analysis of:

  • Where are we now?
  • Where do we want to go? / What do we want to become?
  • How do we achieve it?

There are multiple approaches to strategic planning, including:

  • Objective-based planning
  • Vision-based planning
  • Issue-based planning

Strategic Planning Process

  1. Define/identify the mission
  2. Define objectives
  3. Collect information from the environment
  4. Define strategy
  5. Implement strategy
  6. Evaluate the success of the plan
  7. Make corrections using feedback

Long-Term Plan

A long-term plan sets targets and actions for 3 to 7 years. While the exact timeframe may vary, the goal is to look into the near future to achieve strategic objectives.

  • A long-term financial plan sets financial targets for 3 to 7 years.

Yearly Plan

A yearly plan defines financial targets for the next year and identifies specific milestones derived from the long-term plan.

Areas of Application

Planning applies to multiple domains, including:

  • Financial Planning
  • Operational Planning
  • Enterprise Architecture Planning
  • Project Planning
  • Town Planning
  • And many more

Planning Process

  1. Collect facts
  2. Analyze facts
  3. Identify objectives
  4. Identify various options
  5. Evaluate options
  6. Select the best option
  7. Define how to achieve objectives and implement chosen options
  8. Define evaluation criteria
  9. Define milestones
  10. Define execution steps (plan)
  11. Execute the plan
  12. Evaluate the plan

Benefits of Planning

  • Sets the direction
  • Establishes objectives
  • Organizes activities
  • Helps in risk management
  • Provides control over processes and activities
  • Aids the decision-making process

Budgeting

Budgeting provides the foundation for the yearly plan and ensures that objectives can be achieved. It defines the expected outcome of the plan.

Key Budgeting Areas

  • Sales & Gross Margin Budgets
  • Capital Expenditure Budgets
  • Headcount Budgets
  • Operating Expense Budgets

Forecasting

Forecasting provides projected performance based on current performance data. In financial planning, forecasting focuses on revenue and income projections.

Approaches to Forecasting

  1. Top-Down Approach
    • Analyzes current demand and operations to project future revenue (typically for the next year or so).
  2. Bottom-Up Approach
    • Based on detailed line items from the revenue budget.
  3. Hybrid Approach
    • Combines top-down forecasting with bottom-up allocation for a balanced approach.

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