I am surprised that software vendors often use the words "budgeting" and "forecasting" interchangeably. This post articulates some of the major differences between budgeting and forecasting. I also summarize the questions you should ask your software vendor if in fact you are looking to do forecasting in addition to budgeting. So many times, I hear from companies who have purchased and installed budgeting software that "it was going great until I tried to do forecasting..."
There are dozens of budgeting software solutions aimed at replacing spreadsheets, but most budgeting software solutions are simply not designed to do forecasting. However, the vendors who sell budgeting software tend to position their software as if it will work for both. The reality is that no software is going to be the best for budgeting and forecasting since these are two very different activities.
To see this, let's look at the concept of "what-if analysis" since this is perhaps the most obvious way to differentiate between the two. Budgeting is not characterized by what-if analysis. Budgeting is characterized by an annual process that involves locking down versions, setting up approval processes, and putting in systems that report who changed what number and when.
If you are looking to do "what-if analysis," this means you need a software solution that works for forecasting. You will be planning throughout the year and performing what-if analysis so you can improve business decisions and transform your planning process. "What-if analysis" is also called "continuous planning and scenario analysis"...
Here is a sampling of several of the basic things your software must be able to do if you want to forecast. That is, if you want to do any "what-if" analysis or enable "continuous planning and scenario analysis"
Scenarios MUST have comparative reporting:
- Compare any two scenarios side by side with variances (not just budget and actuals or budget and forecast, but also April forecast compared to March forecast, or "best case" compared to "worst case")
- Compare any two scenarios with variances at all levels of detail (this way when the boss asks why two scenarios are different, you can answer the question during the meeting within seconds)
- Line up scenarios side by side at all levels of detail
Scenarios MUST BE easy to create and maintain:
- Create a new scenario by copying any existing scenario
- Make value changes across scenarios in one operation (otherwise, you need to go into each scenario and manually make the same change over and over again just like in Excel)
- Make structure changes across scenarios in one operation
So that you can do real-time planning and answer questions during the management meeting, your application MUST MEET the “need for speed” for scenario analysis:
- Change values of a scenario with ripple through in real time and show impacts on all financial statements including the Balance Sheet and Cash Flow
- Toggle between scenarios in seconds
- Update scenarios for structure changes in seconds or minutes
I would be pleased to provide more detail on these or other requirements if any reader is in fact looking to move beyond spreadsheets for forecasting.
Special thanks to Rand Heer, CEO of Alight Planning, for articulating the core requirements included in this post. Rand and I are in fact touring the US and Europe with a 3-hour workshop that defines the core requirements for forecasting. This is part of our effort to help distinguish between budgeting and forecasting.