In our last post, we discussed the annual planning ritual, and a three step process for more effective and useful planning. After thinking further about this issue, we thought it would be helpful to define the difference between Planning and Budgeting, as the terms tend to be used interchangeably in many organizations.
As defined by Webster’s, there is a very clear difference between these terms:
- A Budget is a plan for the amount of money that can be spent, and how it will be spent.
- A Plan is a detailed formulation of a program of action to achieve something.
Most budgets are simple plans that are generally prepared by businesses that have not yet developed a formal Vision and Strategy for their future. While budgets are generally relatively easy to prepare, most do not necessarily consider longer term strategic objectives or actions, or the full extent of potential changes in the business environment.
The basic Budget is developed using the current year’s results to date, which are then projected for the year, and applying a percentage increase to each line item, to calculate projected revenues and expenses for the new year. Monthly financial projections may then be calculated for use in reporting and evaluating the operating results during the year.
An Annual Operating Plan, on the other hand, will utilize the results of the Vision and Strategy process, to develop a comprehensive plan (read chart or map) to help the business execute the actions required to achieve the strategic objectives, and navigate through the year. These plans are generally very detailed, and typically include the following:
- Monthly financial projections
- Specific tactical programs, actions, and milestones required to meet/exceed those projections
- Key metrics to evaluate and measure performance to keep the business on track.
Which would you prefer, a spending plan, or a detailed chart to navigate and guide the business for the year?
Regardless of what process you choose, it is critical to have a plan to manage the business.
“A goal without a plan is just a wish.” ― Antoine de Saint-Exupéry
“By failing to prepare, you are preparing to fail.” ― Benjamin Franklin
“We have to build the framework in which we will execute the tasks.” ― LTG Christianson