Budgeting and Financial Planning Distinctions Between Budgeting

Budgeting and Financial Planning

Distinctions between budgeting & financial planning.

The difference between budgeting and financial planning

The difference between budgeting and financial planning

Budgeting and financial planning are often used interchangeably in the speech of laypersons, when they are talking about the economic outlook of organizations. They are, however, very different processes, although the two are interrelated. One analogy is that of someone trying to maneuver the organization like a rowboat over a difficult current: "The energy you use to make the boat move is like the money you have to spend. You can row all day, but if you don't spend any time steering, you'll never arrive at your destination. Budgeting, like rowing, provides the resources...Financial planning, like steering, focuses our effort on our destination. Rowing without steering, or budgeting without a long-range strategic financial plan, will keep you moving -- but not necessarily in the right direction" (East Longmeadow Public Schools' strategic planning and finance: Looking into the future, 2012, East Longmeadow Public Schools).

Without a long-term map in the form of a financial plan, the organization is merely idling along. Without effective steering the form of budgeting, however, having a grandiose idea of one's specific destination means little because you will never 'get there.' Depending on the needs of the organization, there may need to be amendments to the five-year strategic plan on an annual basis. But although the path to the goal may change with the 'current' and the ebb and flow of the tides, the goal must remain constant, unless there are radical changes in the marketplace.

An effective budget is therefore necessary as a first step in constructing an organization's future course on a day-to-day basis. "Budgeting is used for many purposes, including planning and coordinating an organization's activities, allocating resources, motivating employees, and expressing conformity with social norms" (Covaleski et al. 2007: 587). "The budgeting process usually involves routine review of annual expenditures" and is designed to "match revenues against planned expenditures" (East Longmeadow Public Schools' strategic planning and finance: Looking into the future, 2012, East Longmeadow Public Schools). The budgeting mindset is tactical rather than strategic in nature. Budgets are quantitative and specific in their design and document the organization's needs in financial and operational terms (The role of budgeting in management, n.d, 2)

Budgeting is not forecasting, and deals with the organization as it exists in the here and now, rather than a projected future. In contrast, planning involves qualitative as well as quantitative aspects of management. It may identify new goals the organization may wish to pursue, as well as reaffirm the organization's current ones. It may identify new opportunities for financial and revenue growth and ways to streamline organizational procedures. "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" (East Longmeadow Public Schools' strategic planning and finance: Looking into the future, 2012, East Longmeadow Public Schools). The tools of financial planning are both qualitative and quantitative in nature. Examples of qualitative tools include SWOT (strengths, weaknesses, opportunities, and threats) analysis, environmental scanning, and PESTLE (political, economic, social, technological, legal, environmental) breakdowns of the current and future environment. There is also risk planning and contingent planning factored into the five-year strategic plan, given the likelihood that unexpected events will arise that will demand changes.

The relatively narrow focus of budgeting has called many analysts to demand reforms in the process. Often, there are insufficient organizational controls to realize the vision of a budget that is truly holistic in nature and takes advantage of all the organization's resources. Effective budgeting requires a "low tolerance for budgetary variances, detailed budget reviews (i.e., policy level) and high importance on achieving the budgeted targets on a short-term horizon" (Holtkamp 2012: 63). Another problem is the self-interested nature in the budgeting process. Data must be solicited from a wide variety of organizational units and "costs can be overstated so that the subunit receives excess resources" (Church, Hannan, & Kuang 2012: 155). Organizational and personal politics can affect the budgeting process, which can make reaching the strategic goals of the organization more difficult than anticipated. The focus of the budget on daily operational needs and the need to include members of lower-level units in this planning function can reduce the ability of the budgetary process to have a long-term view.