Forecasting and planning are two critical managerial functions and are also relevant for many other functions in the organization. Forecasting essentially refers to making projections or predictions regarding a future event, based on the previous trends as well as current performance. On the other hand, planning refers to the process of developing plans for things that need to be done in the future, and is also based on the existing performance as well as the expectations for the future.
In this article, we will discuss the terms forecasting and planning in detail, and elaborate on the main differences between the two terms.
Definitions and explanations
Forecasting is a process in which the past and current data is used and the trends are analyzed to make predictions for the future. In other words, forecasting pertains to looking ahead and seeking to determine the trends and events in the future, and how they would affect the organization. Hence, it is a very important activity for businesses as it helps them in dealing with future uncertainties.
Managers at different levels usually carry out forecasting. However, sometimes companies employ analysts and other financial experts to make forecasts. There are two approaches that can be used to carry out forecasting. These are the qualitative method of forecasting and the quantitative forecasting method. In qualitative forecasting, the forecasting is based on personal opinions. Some examples of qualitative forecasting are consumer surveys, Delphi method and executive opinion. In quantitative forecasting, numerical data from the past is used, for example regression analysis, time series analysis and extrapolation.
There is no forecasting method that is able to make predictions on the future trends with full accuracy. Some assumptions are always made by the managers on the basis of their experience, knowledge and perspectives. Therefore, it is possible that errors are made in assumption, which leads to forecasting error.
Planning is a fundamental managerial activity that is carried out to determine a future course of action for achieving predefined objectives of the organization. It is a process used to determine what is to be achieved, as well as how and when to achieve it and who will be involved in the activities pursued for accomplishing it. Hence, it essentially presents a complete plan of action for attaining specific objectives.
In the process of planning, a company establishes its overall objectives and the particular strategies that it will use to achieve those objectives, in the short-term as well as the long-term. Planning creates a link between the organization and its future environment and eliminates the gap between the present and the future. It essentially involves determining the future course of events and taking actions to actually achieve them.
In the process of planning, relevant facts and information are obtained and evaluated so that assumptions can be made for the future. A plan of action is then developed for accomplishing the organizational objectives. This process facilitates the organizations in creating a match between their resources and their objectives.
There are three main kinds of planning carried out by organizations. These are:
- Operational planning: planning for routine tasks of the organization at the departmental level.
- Tactical planning: the planning carried out to back the strategic plans pertinent to various areas of the organization
- Strategic planning: Plans developed by the top level managers for achieving the long-term targets of the organization.
Differences between forecasting and planning
The key points of difference between forecasting and planning have been listed below:
Forecasting refers to making predictions about how the company would perform in the future by considering the past and present performance of the company. On the other hand, planning is the process in which the activities to be carried out in the future are determined in advance by the company by considering the previous and current performance of the company.
2. Depends on
Forecasting depends on assumptions and guesses made by those carrying out forecasting; hence, it is not possible to entirely eliminate the possibility of risk. Planning is, however, based on relevant facts and information.
3. Carried out by
Forecasting is carried out by various levels of managers. In addition, the company often employs experts like financial analysts or economists to perform forecasting. In contrast, planning is carried out by the top-level management.
The focus of forecasting is on predicting the events and trends that may occur in the future. On the contrary, planning focuses on analyzing the future activities and preparing the company for it.
In forecasting, facts pertaining to the previous and current performance of the organization are considered. However, in planning, in addition to the past and present facts and information, expectations and targets are also taken into account to determine how the organization should proceed in its activities.
Forecasting vs planning – tabular comparison
A comparison of forecasting and planning in tabular form is given below:
|Considering the past and existing performance of a company to predict its future performance||The process of determining the future activities of an organization so as to achieve the organizational objectives|
|Assumptions and making guesses to some extent||Facts and information|
|Carried out by|
|Managers and analysts||Top-level management|
|Making predictions and estimates about future trends or events||Evaluating the future and making preparations for it|
|Past and present facts||Past and present facts, as well as expectations and objectives|
Conclusion – forecasting vs planning
Persons responsible for planning and forecasting need to possess certain skills and abilities to be effective and efficient. For example, they should have reflective thinking, decision making, farsightedness, long term vision and ingenuity etc.
Forecasting and planning both pertain to future events. However, forecasting serves as a basis for planning and plays a critical part in the planning process. Most of the times, planners are not aware about the conditions that will be present in the future. Hence, they need to make assumptions about the future, which is what forecasting is. Forecasting offers information that is needed to formulate plans. Forecasting is, hence, the essence of planning and it can be said that the success of a plan is determined by the accuracy with which the forecasts have been made.