Posted by Paul Giese ● Jun 21, 2018 8:00:00 AM

What is a Long Range Plan, Budget and Forecast?

You might think that a long range plan (LRP), budget and forecast are interchangeable. The differences were hazy to me until I started working in a financial planning and analysis (FP&A) role. Below, I discuss how each of these tools ensure financial and strategic success.

An LRP is a strategic financial plan that is long-term in nature, generally covering the next three to five years. The process is meant to ensure that the financial direction of the organization  match the strategic goals. Predicting clinical and development costs five years in the future is challenging. Thus, an LRP uses high-level, standard cost assumptions, based on historical data, experience and objective sources. An LRP also maps key inflection points and the associated hires, financings and business development deals. The LRP can assess best-case, worst-case and base-case scenarios and the associated financial impact.

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A budget is a financial plan that covers the next twelve to eighteen months and is more detailed than an LRP. A budget often has detail by vendor, account, department and project. Senior leadership should ensure that the business goals drive the budget. A budget is approved by the board of directors once a year, usually in December. Once approved, the organization uses the budget to hold people accountable for spending that did or did not occur throughout the year, often called a budget-to-actual analysis.

The business should drive the budget, not the budget driving the business.

As circumstances change, a budget can quickly go stale. The original budget is static. A forecast is the revised budget, based on the nature of change in circumstances. The nature of the change in circumstances will drive the level and scope of the forecast process. Again, this is another tool to hold people accountable for spending that did or did not occur. Some years a forecast may not be necessary. Other years, it might be required several times.

At intheBlk, our goal is to help early-stage pharmacutical companies run efficient and effective LRP cycles to help achieve their financial and strategic goals. We know that running this process in Excel is poses significant challenges to time-strapped accounting departments and biotech founders. To find out how our model can help your organization, please contact us below.

Topics: Long Range Planning, Financial Reporting, Excel

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