Budget vs. Financial Plan.

26 01 2010

It’s the start of the year. Forecasts are shaping up and we’re all hopeful for the potential that 2010 may yield. But given the economic fluctuations in the past couple of years, putting together a financial forecast may be an even harder project to accomplish. That’s why a refocus on budgeting may lend a clearer picture of what it will take to achieve your business goals. A budget takes a little work, but, if done right, it is not a major chore and the benefits are enormous. The process is much like recognizing the puzzle pieces that contribute to successful performance, and putting them all together for a broader outlook.

So what’s the distinction between a budget and a financial plan? One example presented the difference to be that budgeting explains the effort utilized to row a boat forward, while financial planning may be equated to steering the boat in the right direction. Budgeting and financial planning go hand in hand; a budget helps propel your business closer to meeting it’s strategic financial plan. And to recognize the value of both, it’s important to acknowledge these ten budget vs. financial planning distinctions:

  1. Purpose, compliance vs. fiscal stewardship: Budgets are usually developed to match revenues against planned expenditures, meeting reporting requirements. Strategic financial planning projects long-term sources and uses of funds, evaluates the effectiveness of programs and departments, and focuses financial resources on programs that help attain business goals.
  2. Process, routine vs. evaluative: The budgeting process usually involves routine review of annual expenditures. The financial planning process identifies areas in which business funds are being overspent or spent on ineffective programs – or effective ones otherwise.
  3. Focus, tactical vs. strategic: The focus of a budget is on taking care of day-to-day operating needs, such as staff, supplies, utilities, and benefits. Financial planning focuses on allocating resources efficiently, making long-range plans for new funds, and ensuring that funds are directed toward goals and priorities of a strategic plan that is well thought out in advance, implemented and followed.
  4. People, middle/lower level employees vs. top administrators: Budgeting and financial planning are often distinguished by the people who design and implement them.
  5. Information, revenue projections and budget allocations vs. spending trends, performance benchmarks, goals, and performance: Most traditional budgets focus on the collection of minutiae, from head counts to supply use to salaries. Strategic financial planning uses this information as a foundation and builds on it.
  6. Time frame, next year vs. next five years: Traditional budgets usually provide data for the budget year and the previous year. Financial plans, in contrast, generally provide two or more years of history and a three- to five-year projection of future expenditures based upon strategic documents (highlighting enrollment histories and projections, facility ages and capital needs, and staffing patterns).
  7. Accountability, spending questions vs. goal questions: Traditional budgets ask, how is your department or program going to spend its funds next year? Strategic financial plans ask, what will you achieve with the level of funding requested for the next five years, and how does that compare to other alternatives for the same goal or service?
  8. Issues addressed, operational vs. strategic: Budgets address the immediate operating needs of a business, such as how much money is spent on salary versus inventory. Strategic financial plans address critical issues, such as when new funding will be needed, based on the cost of alternatives for improving performance.
  9. Influencing vision, short term vs. long term: Traditional budgets affect what happens during the coming year, while strategic financial planning affects results for up to five years. Without the benefit of financial planning, a simple budget cannot affect the long term.
  10. Vision communication, dollars and cents vs. results: Traditional budgets show categorical spending only.  Strategic financial plans show whether the funds are being used effectively, what funds are used for, what they will accomplish and what affect the money will have on performance.

Another suggestion with regard to budgeting is to view your budget as a statement of what you want your business to do. What do you want to achieve (wealth, independence, security)? And in order to create a budget plan, you’ll need to know the answers to questions like “What must my gross margin be?”, “How much business must I do before I make a profit?” and “How much capital do I need?”. But perhaps the most important aspect of having a budget is that it clarifies whether you’re on track to achieving what you want – by using it as an integral part of your management process, you’ll be able to:

  1. Tell your people what you expect them to do;
  2. Measure their performance;
  3. Give them feedback on their achievements, both good and bad; and
  4. Reward them or discipline them as the case may be dependent on that performance.

For further details on outlining your budget, learn how to create an expense budget for maximum profitability and check out the basics of small business budget offered by the SBA. And if you’re doing this for the first time, check out this article on “creating your first small business budget” by OPEN Forum. Most importantly, be sure to avoid these “small business budgeting mistakes” (it’s a great list to be aware of).

2010 is going to be a great year, and with a well defined budget, you’ll be set up for success.

Photo courtesy of the Courier Times.

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One response

2 07 2013
Cristina

I don’t even know how I ended up here, but I thought this post was good. I don’t know who you are
but certainly you’re going to a famous blogger if you aren’t already 😉 Cheers!

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