The Difference Between Financial Planning & Forecasting and How To Excel at Both

Setting your company up for success through financial planning and forecasting isn’t just about looking back at past performance or simply trusting your gut. It comes down to knowing when to use each and, more importantly, leveraging both to your advantage.

Plus, understanding when to plan and when to forecast is key to moving from a reactive stance to a proactive one — a move that can break or make your company’s financial health. And by thinking ahead, your finance team can become strategic business partners, ready to tackle any uncertainties and grab opportunities as they come up.

In this article, we’ll explore the key differences between financial planning and forecasting, explain when to use each, and share tips on how to use both effectively to lead your company to achieve its financial goals.

Planning vs. Forecasting: A High-Level Overview of the Differences

We’ve covered forecast vs. projection in the past. Now, let’s dig into the differences between planning and forecasting.

Financial planning and forecasting are undoubtedly interrelated, but each serves a unique purpose in your company’s financial strategy. Simply put, financial planning is actionable. It’s about creating a roadmap to achieve your company’s financial goals, like generating a certain amount of revenue over a specified timeframe.

On the flip side, financial forecasting relies on historical data to predict what your company can expect to earn in the future, along with the associated expenses over the specified period. So, forecasting helps your company remain financially agile and be prepared for various scenarios.

But that just scratches the surface. Let’s look at each in more detail below.

What is Financial Planning?

As the name implies, planning involves creating and documenting a step-by-step process to achieve your financial goals. This includes efficiently managing costs, allocating resources, and generating revenue.

Essentially, you’re preparing for your best case or ideal scenario. In a financial plan, you’ll analyze your company’s current financial state, think of where you want your company to be a year from now, and map out a strategy that defines how you’ll get there.

Traditionally, financial planning typically takes a long-term approach, spanning annually or over multiple years, and guides your decision-making and course of action.

The planning process

As we’ve covered, you need to assess your company’s present financial state before you create a financial plan. That means looking at your balance sheets, income, and cash flow statements. By doing this, you’ll get a better sense of your company’s financial health. And that’s key to ensuring your financial goals are realistic and achievable.

Once you know the current state of affairs, you can start thinking about your long-term priorities. What’s your north star? Is it increasing revenue, reducing costs, managing debt, or effectively allocating and using your resources?

Because knowing your end game will help you chart a financial plan that will likely get you there, your actual financial plan should consider and cover several essential elements:

• Sales projections and projected revenue
• Capital needs for operations, such as scaling your business or new product development
• Annual budgets and resource allocation
• Financial projections for multiple years, including cash flow, revenue, sales, profit and loss statements, and balance sheets
• Investment strategy for surplus funds to support growth
• Debt management plan to reduce existing debt or leverage debt to support expansion
• Risk mitigation plan to spot potential financial risks in various scenarios and address those.

You could also include exit or succession and tax planning strategies in your financial plan. Most importantly, you’ll set performance metrics, measure your KPIs regularly, and adjust your financial plan accordingly through continuous planning.

Financial plans aren’t a one-and-done task. If a five-year plan isn’t relevant to your company a year from now, the financial plan doesn’t serve its purpose.

What is Financial Forecasting?

Once your financial plan is in place, forecasting helps you predict how your company will likely perform. Specifically, a financial forecast shows you the impact and influence of your operations on your financial statements, including balance sheet, cash flow, and income statements. Simply put, it predicts likely outcomes using past data, current market trends, and calculated financial assumptions.

The Public Companies Accounting Oversight Board (PCAOB) defines financial forecasts as follows:

“Prospective financial statements that present, to the best of the responsible party’s knowledge and belief, an entity’s expected financial position, results of operations, and cash flows.”

That said, during economic turbulence, “nowcasting,” a term coined by Dr. Barry Keating, a professor of business economics and predictive analytics at Notre Dame, is the norm.

Finance teams, especially in volatile conditions, need to leverage the power of real-time data to predict and manage external risks that could prevent you from meeting the financial planl. Frequent forecasting can make your financial plans and decisions more proactive and dynamic, as you can turn data into actionable insights quickly.

Ultimately, real-time forecasts, or “nowcasts,” help your company stay resilient, adaptable, and prepared for rapid changes in an unpredictable market. And that’s where your financial planning and analysis software — a strategic finance platform like Mosaic — makes all the difference.

The forecasting process

If you know the goal of your forecasting, e.g., to support budgeting or secure funding, you can decide whether a short-term (monthly) or long-term (quarterly/yearly) forecast makes sense.

Traditionally, you gather historical data from past periods to set a baseline, including revenue, expenses, cash flow statements, and balance sheets, before forecasting future scenarios. Then, choose a forecasting method, form drivers and assumptions that will influence future financial performance, such as sales growth, cost structure, customer demand, seasonality, and market conditions, and create the forecast.

And if you rely on just spreadsheets, you probably already know that this forecasting process will definitely be cumbersome, time-consuming, and error-prone.

Luckily, in Mosaic, all your financial data is pulled from various business systems — ERP, CRM, HRIS, billing, data warehouse, and flat file upload — into a single source of truth through integrations, so the platform automatically calculates any changes in real time.

In other words, you don’t just streamline your forecasting process. You also save significant time and rely on more accurate data. Plus, Mosaic’s Topline Planner gives you the best of both worlds — the flexibility and familiarity of spreadsheets with the power of technology that offers real-time data.

In fact, Mosaic’s Arc AI makes it easy to automate financial modeling and forecasting. This way, your FP&A team can spend more time on the why behind the forecasts and make high-impact, strategic recommendations.

Moreover, Mosaic facilitates driver-based forecasting by combining your drivers and assumptions and aligning them with business operations. So, your finance team’s role in the company moves from being a backward-looking scorekeeper to a forward-thinking strategic advisor.

A Detailed Breakdown of Planning vs. Forecasting

As we’ve established, planning involves setting an ideal outcome for the year and figuring out what you need to achieve it — usually done once a year. Forecasting, however, is about adjusting those plans based on actual data.

For example, if you aimed for $15M in revenue but the economy took a downturn, your forecast would adjust this target based on the past 90 days’ performance. This way, you reshape your expectations and strategy around what’s realistically happening in the business.

Here’s a side-by-side breakdown of planning versus forecasting:

Ultimately, financial planning and forecasting work together, so one doesn’t supersede the other.

When and How to Use Planning and Forecasting

Companies should regularly update financial plans and forecasts to keep up with their needs and industry changes. Most businesses have annual plans with quarterly or monthly updates. But as we’ve already covered, when things change quickly, like market shifts or new competition, you’ll need to revisit your plans and forecasts more often.

And if your results don’t match your projections, you should definitely update your plan and forecasts. Ultimately, the goal is to boost forecast accuracy and ensure your financial projections are relevant without stressing out or overburdening your team.

Planning and Forecasting as Integrated FP&A Processes

As you may have guessed, planning and forecasting have to be deeply integrated to ensure that your financial plans are based on the most current (and reliable) forecasts. And we know that’s easier said than done. That said, a couple of best practices can set you up for success.

For instance, always align the timing of your planning and forecasting cycles. If you conduct quarterly forecasts, any changes to your plans should happen right after the forecast is completed. This way, your financial plans remain relevant.

Additionally, using rolling forecasts to update your projections continuously gives you up-to-date insights into the planning process. This is particularly handy in scenario planning, where your plans are more comprehensive, flexible, and based on the most recent data.

But to do this well and quickly, you need to collaborate with various departments and integrate your systems and data to ensure a seamless flow between your forecasts and plans and, more importantly, little room for errors.

As you know, finance teams struggle a lot with data silos — but you don’t have to.

Use Mosaic as the Foundation for Your Planning and Forecasting

Here’s the good news. Mosaic is designed for collaborative planning and forecasting.

With Mosaic, you can bring all your financial data together in one place, thanks to automated integrations with your key systems. This setup breaks down barriers and helps teams work together smoothly, making it easier to plan impactful initiatives and spot the best investment opportunities.

But don’t just take our word for it. Hear from Zack McCarty, Director of FP&A at Qwick, who shares his experience working with Mosaic:

With Mosaic, you can set goals and track performance effortlessly with automated budgets instead of actual reports, so you know exactly where you stand. Plus, Mosaic lets you adapt in real time, comment on the latest numbers, and adjust plans quickly.

Whether you’re using a top-down or bottom-up approach, Mosaic has the features you need to help you build flexible, data-driven plans and make informed decisions.

Want to see Mosaic’s magic in action? Request a personalized demo.