What is the difference between Planning and Forecasting?

Forecasting is a prediction of what WILL happen (e.g., 'Sales will grow by 10%'). Planning is deciding what to DO about it (e.g., 'We need to buy 2 new machines to handle that growth').

What are Pro Forma Statements?

Pro Forma statements are projected financial statements (Balance Sheet and Income Statement) for the future. They help companies see what their financial health will look like next year based on current assumptions.

What is AFN (Additional Funds Needed)?

AFN is a formula used to calculate how much extra money a company needs to raise (via debt or equity) to support its targeted growth in sales.

Financial Planning & Forecasting: The Business GPS

Imagine getting into a car for a 1,000 km trip without a map, a GPS, or a fuel gauge. You just start driving. What will happen? You will likely get lost or run out of gas in the middle of nowhere.

Running a business without Financial Planning & Forecasting is exactly like that. It is the process of predicting where the business is going (Forecasting) and creating a roadmap to get there safely (Planning). It connects all the concepts we've learned so far—TVM, WACC, and Budgeting—into one master plan.

The Golden Rule: Forecasting tells you what the future weather looks like. Planning tells you which ship to sail and how much fuel to carry.

1. Forecasting vs. Planning: What's the Difference?

People often confuse these two, but they are distinct steps.

Forecasting (The Prediction): This is looking at the crystal ball. Based on past data and market trends, you predict: "Sales will grow by 20% next year." You can't control it, you can only estimate it.
Planning (The Action): This is the strategy. "Since sales will grow 20%, we need to buy 2 new machines, hire 5 staff, and raise ₹1 Crore in debt." This is what you can control.

2. Sales Forecast: Where it All Begins

Every single financial plan starts with one number: Sales . If you get this wrong, everything else (production, hiring, funding) will be wrong.

How do companies forecast sales?

Historical Approach: "We grew 10% last year, so we will grow 10% this year." (Simple but risky).
Market Research: Talking to customers, analyzing competitors, and economic trends.
Bottom-Up Approach: Asking every salesperson, "How much will you sell?" and adding it up.

3. Pro Forma Statements: The "What If" Financials

Once you have a sales forecast, you create Pro Forma Statements . These are imaginary Balance Sheets and Income Statements for the future.

"If sales double, what will my expenses look like?"
"If sales drop 20%, will I still have cash to pay loans?"

The Percent of Sales Method: This is the most common way to build them. You assume that certain costs (like raw materials) will always be a fixed percentage of sales. If sales go up, these costs go up proportionally.

Example:

Current Sales: ₹1,00,000 | Cost of Goods: ₹60,000 (60%)

Forecast for Next Year: Sales = ₹2,00,000.

Pro Forma Cost = 60% of ₹2,00,000 = ₹1,20,000.

4. AFN: Additional Funds Needed

This is the climax of financial planning. If you plan to grow your business, you need more assets (inventory, machines). Assets cost money.

Some money comes from profits (Retained Earnings). But if you grow very fast, your profits won't be enough. The gap is called AFN (Additional Funds Needed) .

AFN = (Increase in Assets) - (Increase in Liabilities) - (Retained Earnings)

If AFN is positive, you need to go to the bank (Debt) or investors (Equity) to get that money. If you don't raise the AFN, you literally cannot afford to grow.

5. Financial Planning for Startups vs. Giants

Startups: Planning is about survival (Cash Burn Rate). Forecasting is difficult because there is no history. They focus on "Runway"—how many months until cash runs out.
Big Companies (Giants): Planning is about stability and dividends. Forecasting is easier due to years of data. They focus on maintaining profit margins and steady growth.