A business is in constant motion, and its executives are constantly planning how to be profitable—either in their heads or in formal budgets and plans. Intentional planning and budgeting is important for making sense of what’s going on in an organization so teams can anticipate and respond to any situation. But incorporating planning and budgeting into your business cycle also requires precious time and resources.
That means some business leaders might not want to take the time to formalize their plans or allocate the necessary resources—because, mistakenly, they think those activities are wasteful when they already have their plans plotted out in their minds. But the fact is, planning and budgeting have many facets, and not understanding and formalizing the processes can lead to costly mistakes. It’s vital to arm yourself with an understanding of budgeting and planning before any catastrophic events derail your business.
What are Planning and Budgeting?
Planning and budgeting are the processes that identify, develop, monitor and achieve business objectives, and enable and allocate appropriate resources—financial, human and time—to that end.
In other words, the key functions of planning and budgeting enable you to:
- Identify and be clear about what your company’s short-term and long-term goals are.
- Develop objectives to achieve the company’s goals during the planning process.
- Monitor your results by comparing them to your budget, and adjust your course of action by recognizing and anticipating road bumps.
- Achieve the objectives by creating, implementing and executing the plan/budget.
- Enable and allocate appropriate resources of time, capital and people through a formalized plan.
What’s the Difference Between Planning and Budgeting?
Planning and budgeting are often used interchangeably. Although they often overlap, there are differences.
- At a high level, think of planning as the process of mapping out how to get to your destination(s), i.e., achieving the company’s goals via measurable objectives.
- Budgeting is determining what and how much of a specific resource—financial, human and/or time—you need to get there.
Assuming the organization has identified some overarching goals, planning involves developing objectives, setting timelines, adopting key performance indicators (KPIs) and assigning accountability to the appropriate people and departments. Planning tends to be for the long term, reaching three years or more.
Budgeting, on the other hand, aligns business activities with business objectives. Employees are tasked with figuring out how much needs to be spent on operating the business, and where the revenues and cash flows will come from to cover expenses, while still being able to invest back into the business so it can continue to grow. Through this budgeting process, you allocate the resources necessary to execute your plan, which usually covers the upcoming year and three to five years thereafter.
What are the Benefits of Planning and Budgeting?
When organizations don’t plan and budget, it’s like traveling without a roadmap or GPS as you blunder along to find your directions. Likewise, planning and budgeting help to chart the way to a profitable business—with a myriad of other benefits along the way.
Benefits of Planning
Effective planning allows you to:
- Proactively respond to anticipated roadblocks/bumps instead of reacting to them.
- Set clear objectives for your organization and communicate those objectives to the employees.
- Have clear accountability and ownership throughout the course of the plan.
- Have a baseline of KPIs against which you can measure the organization’s performance.
Benefits of Budgeting
Effective budgeting allows you to:
- Anticipate your cash flows and know when and where you’ll need them, instead of wondering if you have enough to meet all your business needs.
- Create an environment for employee buy-in, because they should be involved from the bottom up.
- Gauge the health of your business by comparing actual results to the budget, allowing you to adjust your tactics acco