What is Financial Planning, Budgeting, and Forecasting (PB&F)?

Financial planning, budgeting and forecasting (PB&F) is a comprehensive set of processes used to allocate resources, create financial plans, and develop effective business strategies. This approach extends beyond traditional budgeting’s short-term focus, enabling business leaders to make forward-thinking decisions. PB&F helps enterprises respond quickly to marketplace changes, making it an essential tool for sustained success.

What is Financial Planning?

Financial planning includes budgeting and forecasting profit and loss line items, projecting balance sheet positions, and understanding how these elements impact the statement of cash flows. This forward-looking process ensures financial activities align with business goals and supports informed decision-making across the organization.

What is Budgeting?

Budgeting is the process of creating a detailed plan outlining how a company expects to allocate its financial resources over a specific period, typically one year. It provides a framework to manage income and expenses and serves as a blueprint that sets targets for departments and the organization as a whole. Key steps include:

1. Review organizational goals to ensure every budget item aligns with those priorities.
2. Estimate income based on contracts, historical sales data, and other relevant resources.
3. Identify fixed (which remain constant) and variable expenses (which change based on business activity).

What is Forecasting?

Forecasting involves predicting future financial outcomes based on historical data, market trends, and company performance. Unlike budgets, which are usually fixed for a year, forecasts are dynamic and can be updated regularly to reflect changing conditions. Forecasting helps businesses anticipate challenges, adjust plans proactively, and make more informed decisions. Common methods include:

• Percent of sales: calculating each line item as a percentage of total sales.
• Moving average: using historical data to create short-term estimates.
• Straight line: assuming a steady growth rate over time.

You can also use qualitative approaches, such as market research or expert opinions, to provide valuable insight based on current market conditions. Tools such as Board Foresight bring in latest economic data to help improve forecast accuracy.

The Planning, Budgeting and Forecasting Process: A Step-by-Step Guide

To keep your firm’s finances on track, follow these steps for an effective PB&F process:

1. Define Your Objectives

Before you start the planning, budgeting and forecasting process, review your company’s mission, vision, and goals. Your financial plan should closely align with your company’s business objectives.

2. Consolidate and Prepare Data

The financial consolidation process combines trial balance data from multiple subsidiaries to produce unified financial reports, like income statements, balance sheets, and cash flows. Apply the relevant accounting standards (e.g., IFRS, U.S. GAAP) and manage complexities such as currency translation, intercompany eliminations, adjustments, or ownership structures.

3. Create a Financial Plan

Using your preferred modeling method, create a financial plan covering the next year or two. Incorporate key drivers like product launches, potential mergers, and other relevant factors.

4. Develop a Budget

Translate your financial plan into a detailed 1-year budget, including all estimated revenue and expenses. Allocate resources based on your priorities, ensuring alignment with your goals.

5. Choose a Forecasting Method

Selecta forecasting method and build a custom model based on your assumptions. For greater accuracy, use rolling forecasts instead of fixed monthly or quarterly ones. Update your assumptions to reflect market changes.

6. Monitor Your Performance

Continuously compare your budget and your forecasts against actual results. When variances appear, investigate root causes and adjust plans accordingly.

Common Challenges in Budgeting and Forecasting and How to Overcome Them

Many organizations face similar obstacles during the budgeting and forecasting process:

• Inaccurate data: Since many projections rely on historical data, accuracy is paramount. Consider using an enterprise performance management (EPM) system to minimize errors.
• Data silos: Multiple legacy systems, making it difficult to access relevant data in a timely manner. Automate budgeting and forecasting activities with an EPM platform to improve data consistency and efficiency.
• Static budgets: Inflexible budgets hampers responsiveness to changing market conditions. Rolling forecasts offer a more adaptable alternative.
• Limited planning: Relying on a single modeling method restricts agility to market changes. Use what-if analysis to test multiple scenarios and their impacts.

Master PB&F to Improve Your Decision-Making Capabilities

PB&F empowers you to plan for the future and adjust quickly to changes in the competitive landscape, making it vital for the success of any enterprise. Start leveraging PB&F today to unlock smarter, more agile financial decision-making.

Request a demo to see how Board simplifies planning, budgeting and forecasting, helping your business stay aligned, agile, and ahead of the curve.