COLUMN: Distinguishing between a financial plan and a financial forecast; strategic versus analytical

By Jason Glisczynski

In the world of finance, ‘Financial Plan’ and ‘Financial Forecast’ are two key terms that are often interchangeably used.  Sadly, that is bad for consumers. The easiest way to spot a pretender selling forecasts as plans is, to check if the six components covered later in this article are present. While both forecasts and plans are important, many consumers are left thinking they have a plan, when in reality they do not.

Financial forecasts are fairly easy to create using software programs and are often pitched to consumers as a “plan.” If you have been given a stack of paper with a bunch of spreadsheets and a few charts showing you a “probability of success” such as the one below, then you most likely have been sold a financial forecast, not a plan.

It’s worth noting that these forecasts take only a few minutes to generate, and while helpful, do little more than give you a snapshot of what the future would look like if EVERYTHING that was put into the forecasts happens exactly as it was entered in the software. I think we can all agree that life rarely if ever goes exactly as we predict, so the forecast may be helpful to determine if you are pointed in the right direction, it is hardly a roadmap to achieving long-term goals.

Plans and forecast are two distinctive concepts, each with its own strategic significance and analytical approach. In this article, we will explore the fundamental differences between a financial plan and a financial forecast, providing an in-depth analysis of their unique characteristics and applications.

Understanding a Financial Plan: Laying Down a Strategic Approach to Finances

A financial plan is a comprehensive document that outlines an individual’s or an organization’s financial goals and details a strategic path to achieve them. It’s a forward-looking blueprint that provides a cohesive approach to managing finances, ranging from investment decisions to risk management and retirement planning and a distribution strategy that is flexible enough to meet your ever-changing needs.

It encompasses various components such as:

1. Income and Expenses: A thorough evaluation of your income sources and expense patterns to identify potential saving opportunities. A plan will also include your withdrawal strategy typically using one of the 4 generally accepted methods: fixed dollar amount, fixed percentage amount, life phase model, floor and ceiling model, in conjunction with a proactive asset location AND allocation strategy.
2. Assets and Liabilities: An assessment of your assets and liabilities that determines your current financial status, and a strategy to manage these on a forward looking basis.
3. Risk Profile: Understanding your risk tolerance is crucial to devise an effective financial plan.
4. Investment Strategy: Based on your financial goals, income needs, and risk profile, an appropriate investment strategy is charted out.
5. Retirement Planning: The financial plan should include a retirement strategy that guarantees a comfortable lifestyle post-retirement.
6. Proactivity: Arguably, the most valuable benefit of having a plan (and a professional planner) is making smart decisions and using the plan to keep those decisions free of emotions.  Financial professionals that do investments and use forecasts without a true plan will be reactionary, adjusting when you voice your concern or AFTER things have gone bad, not before.

Financial Forecast: A Statistical Approach to Projecting Finances

While a financial plan is a strategic tool, a financial forecast serves as an analytical tool. A financial forecast utilizes historical data and statistical models to predict future financial outcomes. It projects a company’s future revenues, expenses, and cash flows, thus providing an estimate of the company’s financial performance.

Key aspects of a financial forecast include:

1. Sales Forecast: An estimation of future sales, often based on historical sales data, market research, and industry trends.
2. Expense Forecast: It projects the future costs associated with the business operations, including both fixed and variable costs.
3. Cash Flow Forecast: This predicts the future cash inflows and outflows, helping companies manage their liquidity effectively.

Financial Plan vs. Financial Forecast: The Key Differences

While both financial plan and forecast are essential for a successful financial strategy, the primary difference lies in their purpose and methodology. A financial plan is proactive, laying out a strategic roadmap to achieve financial goals. On the other hand, a financial forecast is reactive, predicting future financial outcomes based on past data and trends.

Below are the main differences between the two:

• Goal-Oriented vs. Predictive: Financial planning is goal-oriented, focused on achieving predefined financial objectives. Financial forecasting, however, is predictive, providing estimates of future financial performance.  Essentially forecasting is a guess at what will happen, not a plan to deal with what ACTUALLY happens.
• Strategic vs. Statistical: A financial plan is a strategic document, outlining a path to achieve financial goals. A financial forecast uses statistical models to make projections based on historical data.
• Long-Term vs. Short-Term: Financial planning often takes a long-term view, while financial forecasting is usually more short-term and is updated regularly based on the latest data.

In conclusion, while a financial plan and a financial forecast serve different purposes, they are both vital tools for managing finances effectively. A comprehensive financial strategy incorporates both, ensuring a balanced approach to achieving financial goals and anticipating future financial scenarios. By understanding the unique features of a financial plan and forecast, one can make informed financial decisions, leading to sustainable financial health and growth.

Jason Glisczynski is the owner and principal advisor for Silvertree, LLC. Investment Advisory Services offered through Brookstone Capital Management (BCM) LLC, a Registered Investment Advisor. Silvertree, LLC, and BCM are separate companies. Visit www.silvertreeplan.com for more information.