How to Distinguish Between a Budget and a Business Plan
In simple terms a budget is a financial forecast for you to use internally as a base point against which future results can be measured. It is created based on what you and your team can commit to. It can be a best estimate of what will happen given some reasonable assumptions, or, it can be a target which will stretch all involved. If all the team agree to work towards it, then it is a viable plan.
It consists of:
- A Profit & Loss forecast.
- A Balance sheet and cash flow forecast based on the above.
You may need several variations to test what will happen to cashflow if circumstances are worse than planned. The main variable is usually sales value.
Comparing future actual results with the budget will allow you to see where reality differed from your original plan. If you did worse than planned, this does not mean your budget was wrong. It was just a measuring point.
It is usually calculated on a spreadsheet with columns for each month, 12 to 18 months ahead. It can be revised annually if outside factors change significantly so as not to keep repeating known variances in your reports. Most accounting systems now have the ability to work with budgets.
A business plan is much more comprehensive than a budget and is usually used for external purposes such as fund raising from lenders or investors. It includes a description of the business, its history, its products/services and its marketing strategy. Its time horizon is usually from 3 to 5 years.
While it contains a financial forecast like a budget its purpose is different and therefore it can be based on different assumptions. A forecast of sales in 4- or 5-years’ time is obviously a complete fiction and the readers will understand this. You must therefore show them that the predictions are plausible by providing enough data to help them judge the risk involved. Avoid hype. Professionals will spot this and lose confidence in the proposal.
We hope this blog post has helped you understand the difference between a budget and a business plan. If you need any assistance with creating or reviewing these documents for your business, please contact me at [email protected]. There are many free and paid for templates on the internet. AI creation tools can help with the text.