Most successful businesses engage in some form of planning to help guide them toward sustainable economic growth. The complexity and objectives of planning may vary from business to business, but the core components of the process are the same. When looking forward in a business, it's important to understand the differences between planning, budgeting and forecasting.
Business planning is the process of setting goals for an enterprise and learning about the obstacles that the company might face. Business planning is important because it provides managers with an objective, well-informed vision of the future. In addition, a business plan is useful for investors and partners, who are usually interested in the company's potential to deliver growth.
Market research is integral to the business planning process. The purpose of market research is to provide information about the limitations that the market might present for a business's goals. Before a company can develop realistic expectations and take action to deliver them, managers must develop a forecast of future revenues and costs. In most cases, this process is based on experience and past results. New businesses cannot as easily forecast future results, but can develop projections based on consultation with help from market data and experienced advisers.
Budgeting is the process of translating plans, informed by forecasts, into daily business operations. Managers budget by using forecast expectations to set limits for costs and make decisions about investments. Budgets are extremely important to guide decisions, communicate expectations to employees, and to control costs. The business' budget may have to be adjusted to account for any failures in accurately forecasting performance. However, most businesses will only realize success when they are able to deliver goods, services or products within the constraints of their budget.
Although planning, budgeting and forecasting are highly related and dependent upon one another, it is important to remember that each is distinct process. Forecasting and budgeting are part of the planning process, although planning also includes the development of goals and business strategies. Forecasting provides a look at expectations for revenues, while budgeting is about making responsible investment decisions and containing costs. In this way, both forecasting and budgeting work together to turn a business plan into a reality.
- The Bridgespan Group; CFOs Delve into Business Planning; 2008
- Wiley Publishers; The Purpose of a Business Plan; 1997
- Penn State University; Business Forecasting Methods; Rob Hyndman; 2009
- Tutor2U; Sales Forecasting; 2010
- "Inc." Magazine; How to Develop Your 2011 Office and Operations Budget; Brenda Porter-Rockwell; 2010
- Free Management Library; All About Financial Management in Business; Carter McNamara
- Stockbyte/Stockbyte/Getty Images