PLANNING VS FORECASTING - 5 Key Diffefences Featured
Planning is thinking about the activities required to achieve a desired goal.
Forecasting is a technique that uses historical data as inputs to make informed estimates that are predictive in determining the direction of future trends.
Both are important in finance and accounting.
However, finance professionals shouldn’t confuse them.
Here are the critical differences between Planning and Forecasting:
Different #1: Objectives
Planning enables organizational learning via in-year tracking, while Forecasting is the execution against those insights.
A business needs a reliable and consistent track of how performance differs from original plans. By comparing actuals to the plan at the right level of detail, we can determine why we performed better or worse. Then we can use that information to adjust plans. Those revised plans then feed into the updated forecast.
Different #2: Accuracy
The essential difference is accuracy. While in everything related to planning - accuracy is critical, a forecast will be only partially accurate. It will turn out, in retrospect, to be precise, approximately.
Different #3: Frequency
Planning is done once or twice yearly, while Forecasting is done weekly, monthly, or quarterly.
Planning done well is a comprehensive process that enables business teams to step out of their day-to-day work to revise strategies, tactics, and action plans. Forecasting takes those plans as a foundation and adjusts them frequently.
Different #4: Horizon
Planning is done for one to five years into the future. Forecasts are updated for the current year or a fixed number of periods, such as 12 or 18 months.
Planning doesn’t aim to maximize accuracy. Instead, it links business drivers with expected outcomes. Specific strategies and investments have long preparation and payback periods, which are considered during planning. Forecasts aim to be as accurate as possible, which is only feasible for a relatively short time horizon.
Different #5: Starting Point
Planning translates a company’s vision into strategies, tactics, action plans, and measurement. Forecasts start with existing plans and associated measures to extrapolate trends.
Planning starts at the highest possible abstraction level, typically the company’s vision and mission. That ensures that all activities are in-line with that ultimate goal. Doing that effectively requires a level of focus that isn’t feasible during regular reporting cycles.
In conclusion, planning and forecasting are two completely different things, but you cannot plan without making a forecast.
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