Budget Vs. Planning
Budgets are important tools for businesses, organizations and families of all sizes and income levels. But a budget, which deals with a specific period of time and attempts to match revenue with expenses, is not a substitute for long-term financial planning. The differences between a budget and planning involve scope and duration, even though both are part of successful financial operation.
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Types
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As a more broad process, financial planning does not take as many different forms as budgets do. A budget is a formal document and may take any number of forms. A line-item budget, for example, includes lists of expenses and income sources, with a result of either a profit or loss for the budget period. Another type of budget, the performance budget, focuses on the cost of a workforce and how much an organization pays for each task a worker completes. Operating budgets deal with revenue and expenses over a set period of time, while finance budgets examine an organization's assets and liabilities in depth.
Uses
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Budgets have primarily tactical uses, covering the operation of an organization over the budget period. They allow organizations to predict and determine how they will meet short-term expenses. They are also useful for determining what cuts an organization will need to make to remain fiscally solvent and avoid excess debt. Financial planning, on the other hand, is a long-term strategic process that relies on trends, patterns and long-term goals to determine the best course for financial success in the future.
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Creation
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Budgets and planning are also different in terms of who creates and leads each type of financial management. Top-level executives are responsible for financial plans in businesses, since these are the policies that will determine whether a business succeeds. Lower-level executives, managers and department heads are more likely to create budgets that allocate the money afforded to them under an overall financial or spending plan. Individual employees may end up being responsible for budgeting limited resources to complete specific projects.
Integration
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Despite their differences, budgets and financial planning both contribute to an organization's success. Budgets manage limited resources to achieve the broad goals that leaders determine through planning. This occurs in large corporations and individual families alike. For example, a family's financial plan may include saving enough money for a child's college education. Monthly and annual budgets that set aside money in a college savings account while meeting household expenses are the short-term tools that the family uses to reach its larger planning goals.
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