We’re all on a budget, and I bet we’ve all done budgeting in one way or another. But, before we go into comparing the two, we need to clarify what a budget is.
What is a budget?
It’s really a plan for spending the money you have or the money you expect to have over a certain period. When it comes to businesses, it’s usually an annual one. When we say that something is in our budget, we actually mean that we have the necessary funds and we can spend them on whatever it is we’ve planned for our business. On the other hand, if it is over it, it means that we’ve not planned for such an expense, and we can’t afford to make a certain purchase.
Types of spending plans
They can be personal or corporate. This means that both households and companies use them. Hence, the very first sentence of this blog.
When you know how much money you have and what portion of it you spend on all your monthly expenses, it will be much easier to stay on top of your finances. These calculations are usually done on a monthly basis. Following a spending plan will also help a great deal to prevent you from going into debt. Conversely, if you are in debt, it will ensure you get out of it.
Business owners create their spending plans so that they can be more efficient in managing their finances. This ensures that all the money that comes in is carefully spent on all the important things for the business (according to the plan and goals of the business). Most commonly, companies create an overall budget. And then, this can be divided into smaller parts. Separate spending plans will determine how much various departments within the company will spend.
What is budgeting?
Budgeting refers to the process of creating your spending plan. If you look it up, you’ll find the following: the process of calculating how much money you must earn or save during a particular period of time, and of planning how you will spend it.
I bet you can now tell the difference. Nevertheless, there are several more things to say about budgeting so you have an even better grasp of it.
How to do it
There are certain steps you need to follow so that you can do budgeting the right way. The process would have to consist of:
- Adding up the total income
- Adding up the total costs
- Monitoring your spending
- Making the actual spending plan
- Adapting it over time.
As a process, it can take some time to do. That will largely depend on the size of the company, but also the time it takes to prepare the plan.
Why you need to do budgeting
As a business owner, you need to make sure that your company achieves your business goals. This is exactly why budgeting is necessary. It allows you to see if your company can go on operating with the expected budget. And also, whether the company can adhere to the financial plan in place.
Indeed, it is well worth the effort because it is a very specific guide as to how the company should be spending its money. It is also perfect for locating discrepancies. Namely, any potential gaps between the planned and the actual spend will be spotted. Moreover, the budget can be adjusted should there be data that certain areas have been underfunded or overfunded.
All in all, the difference between budget and budgeting is that of product and product creation – to use a simile. The former is the plan for spending the capital whereas the later refers to the creation of that plan.
Though we’ve been trying to distinguish between the two in this blog, it’d be fair to say that rather than speaking about the difference, we should actually be talking about how closely linked they are to one another. Namely, without budgeting, you won’t know how much you’ve got to spend. That will then lead to irresponsible financial activity, and potentially make the company fall flat on its face.
To be able to create your budget, why not download our FREE cash flow guide? It will help you with the first three things listed in the budgeting process above.
Plan it. Do it. Profit