What does planning mean?
Planning is figuring out where you want to go, and how to get there. It includes both strategy and tactics. At its basics, strategy implies figuring out the destination you want to get to, and the direction you have to take to reach it. Tactics involve specific solutions to overcoming obstacles you encounter on the way.
What does budgeting mean?
Budgeting means allocating the resources required to execute the plan. The most important thing about budgeting is the fact that it always comes after planning. Budgeting means that you have to decide how you will spend the money (and resources) during the next period (month, year), or until the plan is successful.
And now let’s put them into context. We will do it first from the perspective of a person wanting to do budget planning for their day-to-day expenses, and from the perspective of a business wanting to calculate how it will spend its capital in the next fiscal year.
Budgeting vs Planning for Personal Finance
Let’s take it step by step. First, let’s figure out where you want to go. Let’s say it’s the beginning of the year, January 2022, and where you want to go (meaning the destination) is this: you want to reach the end of the year with $2,000 of debt paid, and $3,000 set up aside in an emergency fund. And right now you’re earning $2,500/month after paying all the taxes. This is the rough outline of a plan. You can extend it with even more details, but this is enough for our purposes. In personal finance, you don’t necessarily have to go so deep into detailed plans (but you can if you want to, if you feel like it’s necessary). So you’ve got the plan. Now let’s advance to the budgeting aspect.
The budgeting part when talking about personal finance is a bit more complicated because you have to break down each month, with necessary expenses, including housing, food, utilities, and so on. First, you have to calculate the absolutely necessary expenses. Let’s say that out of the $2,500 you earn, you have to set aside $2,000 to cover everything that has to be paid. And this includes food, rent, and utilities (but no entertainment/vacation expenses). This means you are left each month with $500 you can distribute towards reaching your plan. Can you achieve it in this case? Yes! You can put $200 aside for repaying debt, and by the end of the year, you’ll manage to repay $2,400. And you can put $300 aside for an emergency fund and you will have $3,600 by the end of the year. It’s even more than you hoped. In this case, you can reduce the numbers a bit so that you end up with $2,000 in debt repayment and $3,000 in the emergency fund, and have the rest of $1,000 distributed towards vacation and special events.
Budgeting vs Planning for Businesses
Planning is the first step in setting up a small business. All entrepreneurship examples I can think about will benefit from having a good business plan. A business plan is an essential written document that provides a description and overview of the company’s future. The plan should explain the business strategy and the key goals to get from where they are now to where they want to be in the future. The plan should include all the things that have to be done, for example: where you plan to make your money or how you intend to attract new customers. Planning ultimately helps businesses to use resources more efficiently and set the optimal trajectory for future operations.
Most businesses create a budget annually at the start of the fiscal year. Businesses were recording budgeting as far back as the 1400s when Venetian investors kept track of their Asian trade expeditions. The meaning of the word “budget” comes from the old French word “bougette,” which means “small purse.” About 300 years later, The British government began to use the phrase “open the budget”, and 100 years later businesses started to use the term “budget” regularly in their finances. Now budgets determine how existing financial resources are allocated, and it is based on the planning done at the step we talked about above. In other words, the budget’s primary goal is to determine what resources to allocate to each part of the company, from salaries to office supplies. In the book named Budgeting Basics and Beyond, the authors (Jae K. Shim, Joel G. Siegel, and Allison I Shim) split the budget into no less than 17 budget types, among which are the master budget, the operating and financial budget, the cash budget, the program budget, and so on. For example, the Master Budget is the overall financial and operational plan for a forthcoming calendar or fiscal year. It’s usually prepared annually or quarterly. And it is a number of sub-budgets tied together to summarize the planned activities of the business. And one example of sub-budgets is the Cash Budget, which is meant for cash planning and control. It presents expected cash inflow and outflow for a designated time period. According to the authors, there are six steps in the budgeting process:
- Setting objectives
- Analyzing available resources
- Negotiating to estimate budget components
- Coordinating and reviewing components
- Obtaining final approval
- Distributing the approved budget.
Usually, depending on how big the business is, a budget committee should review the budget estimates for each segment, make recommendations and revise the budgeted figures as needed.
When things don’t go as planned in an organization or business, the budget is the tool that provides a mechanism for identifying departures from the plan, and it provides benchmarks against which to judge success or failure.
In conclusion:
If you want more detailed information about budgeting and planning, I suggest you read the book: Budgeting: Planning for Success by Larry M Walther and Cristopher J Skousen. If you are more focused on the enterprise side, then this research paper How planning and capital budgeting improve SME performance might be useful.