Planning vs. Forecasting in Financial Reporting

When people think about planning vs. forecasting in financial reporting, it can be easy to get the two of them confused. Planning is strategic and forward-looking, combining data with assumptions and business priorities, while forecasting relies more heavily on current and historical data to project expected outcomes.

Think about it this way. On a lovely spring day, someone might plan to make a picnic. They check their calendar and make certain presumptions about the weather that time of year. Before they head to the picnic spot, however, they should check the weather forecast and make sure they have cash for the ice cream truck. This forecast, after all, can tell them if it’s raining better than even an informed guess they made a week prior.

The concept works similarly in financial reporting. A plan helps an organization decide what to do if it rains. Planning anticipates scenarios, while forecasting updates expectations based on current conditions. Forecasting helps to identify when it is likely to rain. As such, planning looks forward and creates strategic decisions to guide the company, while forecasting is dynamic and driven by data. Financial reporting supports both, and they work together to provide comprehensive financial information.

Businesses need both planning and forecasting to set a strategic direction, measure performance and adapt to change. Understanding the difference between the two can help companies improve their decision-making, financial accuracy and organizational alignment.

Planning vs. Forecasting: Quick Comparison 

While financial planning gives the company a strategy and a set of goals to shoot for, financial forecasting provides the data backing to support the strategy and assess progress.

Financial Planning Overview 

Planning in financial reporting involves the creation of a strategy and financial goals that the organization can use in planning operations, setting budgets and other responsibilities. Planning can be a complicated process that starts with a few big ideas, such as:

• What is the general direction the business should go?
• How can the company achieve what it wants?

With the answers to these questions, executives can formulate a number of strategic initiatives. This planning often comes around the same time as the annual budgeting cycle, so the organization is ready to establish the year’s budgets, define financial goals and allocate resources.

The quality of financial planning depends on the rigor of the process to provide data to inform the strategy. It may be based on anticipated market conditions, assumptions about growth or the company’s operational strategy. The business uses this information to demonstrate how it intends to proceed in the future.

Financial Forecasting Overview 

Forecasting provides the insights that improve the quality of planning in financial reporting. Financial forecasting relies on historical data and current performance to predict how the company will do in certain circumstances. Forecasting aims to answer a couple of big questions:

• What is likely to happen given a specific scenario?
• Is the company on-track to meet its financial goals?

A financial forecast drills down to the basics, focusing largely on how the company’s financial strategy and existing circumstances affect its financial outlook. Forecasting in financial reporting may involve revenue projections, expense estimates and cash flow outlook, getting information from various types of financial statements .

While formal planning cycles often align with annual budgeting, many organizations revisit and refine plans throughout the year. B udget forecasting may need frequent updating. Factors that influence future financial outcomes focus on operational performance, but may also include market trends, geopolitical or supply chain concerns and other external factors.

Key Differences Between Planning and Forecasting 

On the surface, there may not seem to be much difference between planning and forecasting in financial reporting. After all, both involve some discussion of what should happen in the future and are key elements of financial planning and analysis (FP&A) reporting .

While the two concepts work together, they address distinct reporting needs:

• Focus: Planning provides the strategic direction, while forecasting estimates likely outcomes based on current operational performance.
• Continuity: Planning involves goal-setting that may change little throughout the year, while forecasting evolves continuously.
• Time Horizon: A financial planning strategy may extend years, while forecasting provides constant updates about future financial performance in the short-term.
• Sourcing: Planning relies to some degree on assumptions, but forecasting generates insights based on actual financial performance data.

A financial report would be incomplete with only one or the other.

How Planning and Forecasting Work Together 

Think of planning and forecasting as working together to provide a complete picture of the company’s future goals, strategy and financial projections. A financial plan does the work of creating goals and targets for the business to strive for, with an overall strategy that unites them all together.

Forecasting provides the necessary support for measurement and evaluation. A forecast uses financial models to project expected outcomes and compare them against actual performance to establish how the company progresses toward its goals, providing key metrics for assessment, like cash flow. It helps the organization to adjust plans without having to start the planning process from scratch.

Without forecasting, planning might be based on erroneous assumptions. Without planning, forecasting may not make useful projections. Together, they enable the company to make agile decision-making, provide better financial control of daily operations and improve performance tracking.

The Role of Planning and Forecasting in Financial Reporting 

Although planning and forecasting are helpful to creating a viable financial projection, they also form critical elements of financial reporting. Businesses may be required to provide financial reports on a regular basis, especially public companies.

Financial reports, along with operational and market data,provide the data foundation for both planning and forecasting. Planning relies on these reports to set effective and clear goals. Forecasting uses reports to monitor actual performance and generate insights based on reporting data.

The complete package provides the fundamental components of transparency and solid decision-making. With planning and forecasting integration in financial reporting, companies can improve their internal decision-making, increase quality of external reporting and extend clarity in investor communications.

Best Practices for Improving Planning and Forecasting 

Among the common trends in financial reporting , companies may also find these best practices for improving planning and forecasting:

• Data Centralization: Keeping data in one secure, central location ensures that each team has access to the same information.
• Rolling Forecasts: Using rolling forecasts can ensure that the financial projection stays relevant over time, an easy solution to the problem of obsolete static projections.
• Alignment With Finance and Business: Aligning teams helps to confirm that everyone is on the same page regarding goals and projections.
• Regular Updates: Updating assumptions based on new data helps to avoid faulty decision-making from outdated information.
• Use of Automation and Analytics: Automating data collection and processing can generate insights in much less time than it takes for manual collection and processing.

These practices can help organizations improve their accuracy and efficiency in reporting.

How Technology Enhances Planning and Forecasting 

Technological tools can dramatically shorten the workload of creating financial plans and forecasts. As one way to improve the financial reporting process , software solutions can provide the following benefits:

• Data integration in real-time
• Automated reporting workflows
• Scenario modeling, among other forecasting tools
• Collaboration across teams, such as operations, finance, business and legal
• Improved accuracy and compliance

Use of a software platform can help companies simplify their data processing and reporting preparation. DFIN’s SEC reporting software and virtual data rooms enable critical advantages, like centralized reporting, consistent data and efficient financial workflows.

Planning vs. Forecasting Use Cases 

Although companies may use planning and forecasting in multiple reports, they tend to have specific use cases. Planning is commonly used to create a long-term strategy. It can also help to guide annual budgeting and allocation of capital for a designated period.

By comparison, forecasting can help to process performance data into practical insights for informed decisions in the future. Forecasts are typically integrated into performance monitoring, quarterly updates, revenue tracking and expense management. Accurate forecasting can keep the company on track to meet its goals or be able to change plans when circumstances require a pivot.

Plan and Forecast With Confidence 

Planning and forecasting serve complementary roles, but it is important not to mix them up. Planning provides the future thinking that governs the organization’s goals, while forecasting informs ongoing and future decisions that refine and adjust that strategy. Both are essential elements of financial reporting for financial accuracy, strategic alignment and business agility. Organizations that are able to utilize both in harmony can better adapt to change, make informed decisions and drive manageable growth over time.

DFIN’s suite of tools can help companies improve productivity and accuracy in reporting, without requiring reliance on outdated, manual processes. To learn more about how you can increase the quality of your financial planning and forecasting, request a demo today.