When discussing the financial strategy of your company, you’ve probably heard the terms Planning, Budgeting and Forecasting. You may even have heard them used interchangeably. While the three terms are indeed linked and all concern building a financial road-map for your business, they are not quite the same. Let’s take a look at what these terms mean and the similarities and differences between them.
Aligning resources with strategy
Planning is always the first step of any business. Determining a company’s financial position in the short and long term is essential to setting up a viable business and maximizing available assets. When starting out, business owners don’t yet have a history of financial knowledge to draw on and hence may make projections based on information gathered from comparable businesses. Planning aligns available resources with the business strategy, and puts in place measures of performance and progress.
Adapting the plan on a continual business to incorporate new information ensures that it remains workable, based on the business’s actual needs in the long run.
Budgeting is the process of creating an estimate at the beginning of the current financial year to manage and control the company’s income and expenditures. A budget can be seen as a road map that takes into account the projected income and expenditure for that given year. In short, budgeting ensures that there will be enough money to cover the operational costs. This step must accurately take all financial factors into consideration. Budgeting is done after the planning stage and it ensures accountability and the promotion of behaviors that will effectively execute the business strategy.
As with planning therefore, budgeting is the process of aligning available resources with business strategy. Budgeting however is the process of using past behavior to predict future behavior of the company.
Adjusting to changing conditions
The purpose of financial forecasting is to predict the financial future of the company based on certain assumptions. While the budget is used as a financial planner, the forecast uses this plan and compares it to the current financial direction of the company. This is done to predict the company’s position at the end of the year. Forecasting is used to see whether the company will meet or exceed the expectations of the budget, allowing the managers and controllers to set attainable goals. Forecasting also helps to identify trends that are used to grade the company’s financial position.
Forecasting can only be done after planning and budgeting. Once the business is operating and begins to show a profit, the business is able to project future profits and to consider how they might reinvest future gains into expansion. Forecasting is therefore similar to budgeting, however it differs in that it also considers external factors.
Benefits to your business
Having strong planning, budgeting and forecasting practices in place, has the following important benefits for your business:
- Increases transparency and the quality of budget figures
- Enables more accurate and rapid data collection and reporting
- Increases the quality of decision-making, due to more accurate data
- Encourages commitment by business stakeholders
- Establishes a clear audit trail of all changes
- Stimulates positive insight
Xcel accounting has over 15 years of experience in finance and accounting, and extensive experience in consultancy and the industry. We offer comprehensive accounting and finance outsource services to small and mid–sized companies and can bring financial expertise to your business. We’re committed to helping Dubai businesses take the reins on their financial strategy, by taking care of all their accounting needs.
Let us assist in evaluating your accounts and enabling you to take more informed business decision. Book a free consultation with us and we’ll assist you in building a road-map for your business that leads to financial success.