We always love to share helpful insights from our incredible community — both from operator investors and founders alike. Today, we’re digging into a particularly hot topic. The current macroeconomic environment has cast financial planning and analysis (FP&A) directly into the spotlight. To unpack the critical details, we turned to finance leader Christina Ross (former serial CFO turned Founder & CEO of OpCp PortCo Cube) - who has also shared her wisdom on how to interpret SaaS metrics like customer retention, the SaaS magic number, and CAC/LTV/NDR.
She addresses the common question from executives looking for clarity on the numbers: “what’s the difference between the plan and the forecast?”. You hear these terms in the boardroom, but what purpose does each serve? Christina lays it out below.
What's the difference between the plan and the forecast?
Christina: Financial forecasting, budgeting, and planning each serves a unique purpose. A plan serves as the foundation, a budget guides how to allocate cash, and a forecast projects the financial future of the business. CFOs understand that each is a standalone piece of the company’s financial puzzle.
Think of the "plan" as the financial blueprint, outlining the company's long-term vision, including growth milestones and strategies. It guides decision-making, resource allocation, and overall financial strategy, acting as a touchstone.
The "budget" acts as a steward, translating plan aspirations into actionable steps. It allocates funds to departments, projects, and maintains fiscal discipline by balancing revenues and expenses. It's a tangible link between strategy and day-to-day operations.
The "forecast" is dynamic, like a compass in uncertain seas. It uses real-time data to project financial scenarios, aiding decision-makers in anticipating challenges and opportunities. This real-time perspective aligns with evolving business landscapes, allowing leaders to steer the financial ship effectively. Together, these elements create a holistic financial narrative that drives the company forward.
What is financial planning?
Christina: Generally, a financial “plan” aims to define the financial direction and vision of the organization within the context of a broader business plan.
Leaders ask themselves how the business will stack up in the next one, five or even 10 years. The “plan” answers that question by outlining the company’s operational and financial objectives. Executives build out teams and infrastructure based on this plan and the defined goals.
Colloquially, the “plan” is sometimes used interchangeably with the most recent budget or forecast, and can be broadly considered the budget or forecast that is the most likely “version of truth”.
What are the benefits of financial planning?
Christina: Because of the long-term nature of a financial plan, it allows for more flexibility and creativity. In the case of a financial plan (versus a budget, for example), the means are less important than the ends.
Ultimately, a good financial plan provides a top-down operational framework to explore various scenarios, as well as context around goal clarity and alignment, resource allocation, budgets, risk mitigation, capital planning and investment, cash flow management, debt management, and so much more.
What are the challenges of financial planning?
Christina: Since an organization's future is undefined, financial planning is a perpetual process. Despite this, a plan is more static — more of a roadmap than a document updated daily. The plan relies on historical performance data and subjective financial analysis, so it can never be fully accurate.
This is why FP&A professionals are tasked with incorporating scenario and what-if planning into their financial planning practices. Scenario planning involves creating alternative projections based on different possible outcomes. By considering various scenarios, you can assess the financial impact of different market conditions, industry trends, or internal changes.
Question: What is budgeting and how does it influence a company's financial operations?
Christina: Budgeting is a strategic financial practice predominantly undertaken by businesses, often spearheaded by their finance teams. It involves crafting a comprehensive plan to allocate the company's capital during a defined period, which can span a month, quarter, or typically an entire fiscal year.
The primary objective of a budget is to judiciously determine the allocation of resources across various segments of the organization. This encompasses everything from payroll commitments to requisitioning office supplies. Central to the budget's essence is the management of the company's cash position, encompassing anticipated revenues and expenses. Through this meticulous allocation, specific financial objectives are established for the foreseeable future, ensuring financial discipline and prudent resource utilization.
Traditionally, businesses formulate budgets on an annual basis, setting them in motion as the fiscal year commences. This budget is often regarded as a cornerstone, a financial blueprint that provides a structured path for the company's financial activities. It is commonly perceived as "unmovable," serving as a robust framework that guides fiscal decisions throughout the designated period.
What are the benefits of a robust budgeting process?
Christina: A thorough budget offers clear guidance on how a company should be spending its resources by providing a line item for any expense imaginable. Budgets also create accountability for departmental spending because overages are apparent and gaps in appropriate funding become clear as the year unrolls.
Teams should review the budget regularly and compare it with actuals, making each department responsible for any variances that occur.
Prepare a clear timeline for the budgeting process. A timeline provides a structured framework and clear roadmap for the budgeting process, ensuring efficiency, accountability, and effective resource allocation. By outlining key milestones, deadlines, and dependencies, the timeline enables you to organize your activities, collaborate with stakeholders, and track progress more effectively.
Additionally, plan for multiple outcomes. Scenario planning is crucial for anticipating and responding to uncertainties, risks, and opportunities— especially for growing businesses. By exploring “what-if” scenarios, you can identify potential risks, develop contingency plans, and make informed decisions to mitigate negative impacts or capitalize on positive outcomes.
What are the challenges of budgeting?
Christina: Budgeting can be a difficult process because of the kind of involvement it takes across departments, including meetings and negotiations with department leaders to determine the amount of cash they will need to accomplish business goals within — or outside of — the budget. Managing up to key decision-makers while managing down to operational teams, department heads, and individual contributors is often the toughest part of the budgeting process—but it’s also one of the most important.
Effective management up and down facilitates a collaborative and inclusive approach to budgeting. It ensures that financial considerations are incorporated into operational decision-making, while also providing operational teams with the necessary financial guidance and support. This best practice fosters a culture of transparency, accountability, and shared responsibility, leading to a more accurate, realistic, and actionable operating budget. It allows you to realistically answer questions like, “Can we do X?” and “Do we have the resources to do X?”
Since budgets are generally made to last an entire year, a budget might constrain necessary spending (or saving) if any unexpected situations in cash flow arise.
Essentially, expense allowances are built not to exceed budget limits, while income projections are the minimum needed to balance the budget. Financial analysts need to calculate the variances between the two figures to evaluate the budget's efficacy and the organization's fiscal health.
What is forecasting and how does it influence a company's financial operations?
Christina: A forecast is a financial snapshot of the future as it is best understood today. When creating a forecast, teams must examine possible financial outcomes based on the most up-to-date drivers and assumptions. The result is a view of how the business is trending so that the leaders can determine whether or not adjustments should be made to the existing budgets or plans.
For example, the budget might assume that the business will hit a $10M revenue target, but the forecast shows that the business is on target to only achieve $8M. Given the difference between the forecast and the budget, the business might adjust the variable costs associated with lower revenue, while simultaneously adjusting the expense plan in order to hit cash targets.
What are the benefits and challenges of forecasting?
Christina: A company’s financial forecast is updated regularly, such as monthly or quarterly. The forecast’s undefined nature allows it to be used for both short-and long-term projections and can adapt to recent performance data. In this way, executives can make changes in real-time, adjusting their operations — such as production, marketing approach, and staffing.
Forecasting can be a time-consuming process that not all businesses are able to stay on top of regularly. Because of this, many businesses update their forecast data periodically, such as quarterly or biannually. It’s considered a best practice to build a rolling (ongoing) forecast to make these adjustments in real-time.
Ultimately, what should a founder know about planning, budgeting and forecasting?
Christina: All three terms reflect expectations and estimates of your financial objectives. Financial planning lays the foundation for budgeting — suggesting that a financial plan must precede the budget so that company leaders have an idea of what they are budgeting for. Meanwhile, a forecast projects how far over or under expectations a company may be.
A financial plan is a strategic, long-term tool, while a budget is tactical and short-term. A financial forecast is an updated reflection of the future. In a way, the forecast bridges the gap between the business plan and the budget.
The most financially disciplined businesses leverage all three tools in planning and operations.