Difference between financial forecasting and planning

Forecasting and planning are interrelated because they decide the business's future goals. Both of them help business leaders estimate future events, so they are used interchangeably. But in reality, forecasting and planning have many key differences. 

Financial forecasting

Financial forecasting refers to the act of estimating future performance based on past and present data, performance, and future trends.

Types of financial forecasting:

Qualitative method: 

This is a more personal opinion-based forecasting rather than a forecast based on numerical data. The following are types of qualitative forecasting.

Delphi method:

Delphi method relies on expert opinion, which is obtained by repeatedly asking them to fill out multiple questionnaires or answer multiple rounds of the questions. Their answers are then analyzed and summarized and

Market Research:

Market research is a very famous qualitative method in which forecasting is done by conducting market research using customer surveys and questionnaires.

Informed opinion and judgment:

In informed opinion and judgment, forecasting is done by getting information from intuition and judgment from informed sources. This judgmental forecasting method involves preparing a set of future scenarios based on market research.

Quantitative method

The quantitative forecasting method is forecasting a future event based on past numerical data. The following are types of quantitative forecasting.

Naive Forecasting method

The naïve forecasting method is based on taking the actual values from last year and considering it as the present period's forecast without making any changes. 

Moving average

The moving average forecasting method stresses taking the average of previous periods and then considering it as the present year forecast.

Time series forecasting method

Time series forecasting relies on historical data because it assumes that historical data patterns will repeat in the future. Moving averages, exponential smoothing, and future trend analysis are all examples of time series forecasting methods.

Even though forecasting stresses facts, none of the above forecasting techniques can be 100% accurate. Forecasting errors may happen (e.g., due to unforeseeable events).

Financial planning

Financial planning is also an important managerial function that decides what to do, when, and how to do it while considering the future goals of an organization. So, planning helps the top-level managers of any business to design future courses of action and acts as a guide for future action for the entire company.

The main purpose of a financial plan is to draft a future course of action after getting relevant information regarding the future environment. So we can say that planning relies on performance and present performance and hence establish a link between the present and future of the business.

Types of financial planning 

The following are mainly used types of planning: -

• Operational planning: It is done to carry out the business's day-to-day activities.
• Tactical planning makes strategic plans relevant to various business functions.
• Strategic planning is done by top-level managers to achieve the business's long-term objectives.  

Comparison chart

The key differences between forecasting and planning in comparison chart form are used to highlight their key differences.  

Example:

Forecasting is complex and requires extensive calculations. It takes a long time to do it manually. In the above example, we have used a time series forecasting method with a Four-period moving average of past performance to get the 2023 forecast. The forecast from past numerical data is $51.500.

We have reached a forecast for 2023 using the time series forecasting method from past performance.

In the example above, you forecast $51,500 for 2023, but you plan to get revenue of $55,000 in 2023.

So, the plan for the next year includes the forecast of 51,500, which is based on past numerical data for the years 2019-2022, which is achievable as it is based on past and current performance, and the aim of $3,500 more than the forecast is based on the expectations of the business leader.

So, generating $3,500 more than the forecast, based on past and current performance, suggests that the business leader will require a new course of action. In short, forecasting relies on past and present performance, while planning stresses the reflective thinking of the business leaders.

Final words

In short, planning and forecasting are two important managerial functions that are closely related as both are goal-oriented and require relevant information to predict future events and develop future goals.

Planning differs from forecasting, but planning premises rely on forecasts to estimate future performance. The planning premise relies on top-level managers' mindsets and future goals, so planning makes subjective estimates. In contrast, a forecast can be a subjective estimate (i.e., qualitative forecasting) or an objective estimate (quantitative forecasting) based on past and present performance.