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What Is the Difference Between Budgeting and Financial Planning

by Amarachukwu
What Is the Difference Between Budgeting and Financial Planning

The term budgeting refers to the business planning process. Budgeting aims to create a budget that reflects the company’s planned future in figures. Therefore, Budgeting is to be understood as one of the most important controlling instruments, since providing the data type plan provides the basis for implementing the plan-actual comparison.

Thus, Budgeting defines certain target variables that must be achieved within the planning period. In addition to monetary values, quantitative and qualitative parameters, such as output quantities or permissible error rates, can, of course, also be planned as part of Budgeting!

The Budget contains different sub-plans: e.B. sales, sales, production, material, personnel, investment, marketing, and cost center. The company-wide income statement, the financial plan and the planned balance sheet are then derived. Especially a dynamic environment must ensure a high degree of integration between the income statement, the financial plan and the planned balance sheet.

Budgeting as part of integrated success planning, financial planning and balance sheet planning

Depending on the controlling concept of the company, the profit and loss account (income statement) is planned at profit center, cost center group or cost center level, and at cost types or G/L account level. In any case, budget planning should be based on the company’s organizational structure. Especially in groups of companies that also need efficient investment controlling, a standardization of the G/L accounts or at least the cost types must be realized by a Group-wide chart of accounts or cost type framework – ideally supported by cost accounting – since a Group-wide reporting and key figure system can already be prepared as part of the structuring of the Budget. The basis for effective and efficient investment control is created.

Operational and strategic Budgeting

 

Budgeting distinguishes between operational and strategic Budgeting. Operational budget planning aims to establish, specify, and control short-term Budgets for a period of usually up to one year. In strategic budget planning, the goals and targets are set for up to 10 years into the future.

What is the task and objective of Budgeting?

The creation of a budget serves to plan the company’s development. By defining certain target specifications (compare the lexicon contribution to Debit and credit), the individual budgets within a company are the basis for performance measurement and success monitoring. 

 

In general, in the course of Budgeting, the specification of goals and planning

values are combined with cost center responsibility.

 

Certain objectives are linked to the preparation of a budget. These include:

  • The motivation of the employees
  • The definition of benchmarks for performance measurement
  • The determination of future funding requirements for financial planning

 

Each Budget usually contains different sub-plans, which are used as a basis for the company-wide income statement or the preparation of the Budget and the planned balance sheet. Typical sub-plans within a budget are:

 

  • Investment plan
  • Material plan
  • Production plan
  • Sales plan
  • Sales Plan

 

Within the framework of Controlling compliance with the Budget, requirements are usually monitored once a month. Regular budget monitoring is an important instrument to take countermeasures in good time in the event of an overrun.

Multi-level Budgeting

Creating budgets for individual divisions is usually carried out in several stages. It should be noted that short-term operational planning does not conflict with long-term strategic planning and that all budgets are coordinated at both the horizontal and vertical levels. 

 

The individual budgets do not have to be created as a rigid, immutable corset. The individual budgets can and must be partially adapted to the changing circumstances in the event of the company’s positive and negative development.

Budgeting – when and for how long?

Ideally, budget planning takes place before the financial year to be planned begins. The duration of the budgeting process should be kept as short as possible and essentially depends on the size of the company, the planning complexity and the controlling software used. 

When Budgeting is made and how long it takes depends very much on the dynamics of the industry. As a guideline, the more dynamic the industry, the faster and more flexible the budgeting process and budget structure should be.

What Is the Difference Between Budgeting and Financial Planning?

We recommend the implementation of a timing concept! In any case, Budgeting must be seen as part of the timing concept and integrated into it. 

Budgeting and Forecast Controlling

Suppose the plan is combined with actual values from previous months in the current financial year and enriched with new information during the year. In that case, this is referred to as a forecast or an extrapolation. Especially in a dynamic environment, the forecast is gaining importance. 

What Is the Difference Between Budgeting and Financial Planning

Essential for the quality of the forecast is the ability of sales control to estimate future sales well. Suppose it is possible to estimate future sales well with the help of sales control. In that case, you have a good basis for operational liquidity management, which can also be referred to as working capital management.

Understanding budgeting as a process

Budgeting should be understood as a process that summarizes all activities within the preparation, approval, enforcement and adjustment of budgets. Budgeting is, therefore, an important controlling instrument for management, as Budgeting promotes the coordination of activities in the company and thus the mutual flow of information. 

 

All organization functions must be included in Budgeting, as they more or less influence each other. Strictly speaking, it must be assumed that each sub-plan influences the other functions and thus also the sub-plans derived from them. Thus, several iterations are usually necessary as part of the planning.

 

To allow an efficient and effective planning process, we recommend developing a bottleneck-oriented planning process that can be assumed to lead to the smallest possible number of iterations.

 

With the planned income statement, it must be possible to estimate the cash effect of the planned future measures, i.eA robust financial plan must be derived from the succession planning, which forms the basis for active liquidity management. 

 

In this context, it should mention that, especially in times of credit crunch, working capital should also be subject to planning in any case. Since active working capital management leverages considerable financing potential, financing bottlenecks can be identified and eliminated early.

Benefits OF Financial Planning

  1. It helps you define the use you want to give to your money: spend, save or invest

* Spend on necessary things that you consume regularly (example: food) or on things you want (example: dinner with friends).

Keep in mind that a need is the lack of something to survive or be better, while a desire is an impulse towards something you want.

  1. Save to have money for emergencies and unforeseen events or the fulfillment of short, medium and long-term financial goals:
  2. Short term: weeks or months, such as purchasing a T.V.
  3. Medium-term: 1 to 3 years, such as buying a car
  4. Long term: more than three years, such as paying for your children’s education
  5. Invest in things that help you generate another source of income, such as a business or real estate.

 

Steps To Make Your Financial Plan

STEP 1: Make a diagnosis of your financial situation using a record of income and expenses

Income: 

 

All the money enters the household in the month. Include all of your sources of income, those of your spouse and other family members living in the house. Write down in a notebook the approximate values of:

* Net salaries (what they receive after all discounts)

* Income from the business (in case of owning a business)

* Rental of some property

* Remittances (money received from family members living abroad or in another city)

* Sale of some property

* Periodic income (if they have an income that arrives every so often, they can calculate the total received in the year and divide for 12, and thus determine how much is the average monthly income)

* Alimony (in case of being divorced)

E.Y.E.! After writing down the estimated income, write down the actual income for a month and compare.

Expenses: Write down every penny that leaves your home for a month. If you are married or live with relatives, everyone must do the exercise to have real value.

STEP 2: Make a budget

This tool serves to organize the income and expense record information and turn it into a projection of what you plan to spend in a period. It is better if the period is longer than a month because expenses change seasonally. For example, if you have children, you spend more in the month of entry to classes for tuition, uniforms and supplies. It is also spent more between October and December for the year holidays.

 

The Budget should include:

In rows:

  • Income: Detail of all expected income in the budget period.
  • Expenses: Detail all the fixed and variable expenses you expect to have in that same period.
  • Remember to include saving as one more expense, with a minimum savings goal of 10% of the average monthly income.
  • In the expenses, it is important to include a projection of the extra expenses you have throughout the period: vacations, birthdays, car maintenance.
  • Available money: it is the total income minus the total expenses.

 

In columns:

  • Expected money: how much it is estimated to earn and spend.
  • Money received: real values that are earned and spent.

STEP 3: Set goals

The financial plan relates to the life plan. Not because money is the most important thing, but because it is a means to achieve what you want. Depending on life priorities, you can set financial goals.

 

It is important to distinguish between dreams and goals. A goal is a route to fulfill a dream with concrete steps. It is a plan with concrete steps on using money to achieve dreams of life.

 

Financial goals should be S.M.A.R.T.

  • specific
  • Medibles
  • Actionable
  • Realistic
  • Achievable in a reasonable time

 

To write the financial goal, identify:

  • What do you want to achieve?
  • At what time?
  • How much money should be allocated?

 

For example:

Goal: Buy a house.

Meta S.M.A.R.T.: Save $500 a month for three years to pay for the entrance of a house.

STEP 4: Compare

  • Compare goals to Budget and answer the following questions:
  • Will it be possible to achieve the financial goals set with the available money?
  • If it is not possible to achieve them, what factors (Budget) can be modified?
  • Increase income: how, how much?
  • Reduce expenses: how, how much?

 

Write down the adjustments you can make to the Budget and develop a detailed action plan to achieve them.

 

The 50/40/10 rule can help you better distribute your income. 

  • Allocate * 50%, that is, half of your income, to the necessary expenses. 
  • Maximum 40% of your income to optional wishes. 
  • Minimum 10% of income to savings, allocating first for an emergency fund (minimum three months of average household income) and then to meet short, medium and long-term goals.
  • Take into account your life stage when making your financial plan Financial life changes day by day and especially concerning age: From 18 to 30 years:

 

stage of vocational training (income generation, financial independence, the definition of the economic

years: acquisition of essential goods, family development, expenses and income growth * From 46 to 55 years: consolidation of family wealth * From 56 to 65 years: pre-retirement (retirement planning)

 

* From 65 years onwards: depends on the good planning that has been done throughout life

COUNCILS

* Write your financial plan.

* Be conservative and plan for the worst.

* Draw up the plan with your loved ones or close people and give them an account.

* Maintain realistic strategies to prepare your Budget and plan your finances, focusing on your goals.

 

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