Financial Forecasting vs. Financial Planning

Finance ManagementBanking & FinanceGrowth & Empowerment

Both financial forecasting and financial planning can be applied to businesses and individuals, depending on the needs of the companies and the people, respectively. While financial forecast is made on a future date, financial planning is used to reach the goal on the set date in a step-by-step manner.

Financial Forecasting vs. Financial Planning

Although Financial Forecasting and Financial Planning are related in terms of future endeavours, however, there are stark differences between the two. These differences are as follows −

Estimation vs. Forecasting

Financial forecasting is an estimation or a projection, whereas financial planning is a process that should be followed to reach a certain financial goal in terms of growth or revenue, or any other financial variable.

In other words, while a financial forecast estimates how much revenue or growth the company would achieve, a financial plan charts the steps using which that growth will be achieved. In broader terms, financial planning can be considered as a road map created in the present while financial forecasting is a projection of the future made in the present time.

Measurement of Profitability vs. Asset Utilization

In order to succeed in businesses, financial forecasting is needed that is accurate and based on practical, achievable terms. It is necessary for businesses to manage working capital and cash flow so that the growth and profitability of the company can be measured.

Therefore, a company must project how much revenue it wants to earn and what will be the expenses in earning this revenue over a certain period of time. This information is available in the financial forecasting documents of a company.

Whereas, Financial plans are the tools for businesses to lay out a process of utilization of their assets and capital in a step-by-step manner to reach a financial objective, such as growth in revenue, in accordance with the financial forecast made for a certain period of time. Financial plans are also called business plans because they have all the ingredients of a business plan that is made for the company to reach its maximum growth and profitability using the resources it has in its possession.

Updated Data vs. Guide for Financial Position

Financial forecasts are created and updated annually as new data about costs and assets become available. By making the necessary assumptions based on the new data, individuals, and companies can make more accurate financial projections. Usually, it is easier for established companies to forecast their business environment and status in a certain period in the future than a newly established company.

This is so because the established businesses have a steady flow of capital and their business models are set for the future. Moreover, the businesses of new companies go through significant seasonal and cyclical fluctuations that make forecasting a bit inaccurate.

For an individual, a financial plan can act as a guide to let them know their current financial position and their future goals which they want to achieve after a certain period of time. The financial plan also tells the areas in which an individual would need to focus to achieve the goals of the plan without any significant delay or hardships to follow the planning process.

Income and Expenses vs. Process of Investments

For an individual, a forecast contains his income and expenses over a certain period of time. Using the data available in the forecasts, individuals can plan their savings and investments apart from generating newer avenues of income. Individuals can also include anticipations of future expenditures in their financial forecasts themselves in order to plan expenses according to their incomes.

An Individual financial planning process takes care of investments, taxes, and other financial inputs apart from the financial life events, such as retirement and promotions which have an impact on the income. The individual financial planning process depends on age, debts, assets, income, and expenses which are the most influential aspects of an individual’s financial management procedure.

raja
Updated on 30-May-2022 11:49:15

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