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Role of Financial Planning, Budgeting, Forecasting & Analysis

Planning, Budgeting, and forecasting collectively known as PBF helps in determining and detailing an organisation’s goal. The trio collectively is a process in the finance department of an organisation and is often misunderstood by the common (wo)man. This article details the role of PBF process in detail and also highlights its importance in an organisation.

Financial Planning Budgeting Forecasting

Planning- It provides overall layout for stating the directional and financial objectives of an organisation. Companies generally layout annual plan which becomes a part of the overall strategic plan for the organisation over a span of to 3 to 5 years. This generally involves senior management who lays down their vision and goals. The planning stage comprises of following stages:

  • Strategic Plans: It includes overall goals and objectives of an organisation and is both qualitative and quantitative in nature.
  • Long-Range Plans: This primarily involves quantified financial plan of an organisation which is generally spread over a period of 3-5 years.
  • Annual Plans: As the name suggests, this is the annual plan and provides break-up of annual targets of the overall long term strategic target.

Budgeting- Budgeting in a layman’s term is a subset of overall planning. It supports the plan with detailed operational view and is generally accounted for short-term period. It involves “what is expected” from the business based on the approved plan. Budgeting primarily focuses on the following major components:

  • Margin Budgets- Budgeting the levels at which the margins should hover for the organisation
  • Gross and Operating- Operating margins and Gross margins at which the companies should operate
  • Capital Expenditure- Includes expansion plans, buying of fixed assets
  • Personnel budget- Increment to workforce, hiring and firing
  • Operating expense budget- Total operational expenditure

Forecasting: As the name suggests it utilises current data to project future data. It takes into account the actual performance data to project the future year’s performance. This primarily focusses on what is actually happening and takes into account income statement. Following three methods are generally used for forecasting:

  • Top-down Approach: It focuses on the demand and operational conditions which is futher translated to revenue prediction. It is like a free fall model. It includes many factors like market data, economic indicators and general consumer trends.
  • Bottom-up Approach: In this the current line-item details are entered as per the budgeted revenue.
  • Hybrid: As the name suggests it is the combination of the above two methods.

It is seen that the three processes of PBF are different and requires good amount of understanding of financial concepts. The main purpose of the PBF process is to help in understanding operational plan and also understand financial position.

Following are the key characteristics of a financial plan:

  • Ability to generate comprehensive picture of financial objectives
  • Ability to quickly gauge the impact of operational activity
  • Ability to identify the loop holes (using the in0build relationship) which will impact the final objective

PBF process requires unique insight on how the enterprise generates cash flow. It is unquie and complex in nature and helps in running numerous financial and operational what-if cases which provide insight about “what is possible”. An effective and optimised PBF process should ideally provide a system of check on possible and expected performance of the organisation.

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