Introduction
Organizations undertake financial planning in order to ensure that they utilize resources effectively to achieve their intended objectives. Financial planning mainly entails strategically devising means through which the organization can source funds and use them efficiently to achieve growth and development.
However, a plan on how to allocate the funds is also critical in ensuring that the intended growth and development are attained. This is the essence of budgeting. This paper carries out an elaborate analysis of the financial planning process, determining the difference between budgets and financial plans and explaining the role of strategic management.
The distinctions between a budget and a financial plan
While budgets often deal with data relating to both the specific budget year as well as the previous year, financial plans cover at least two past years (Mittal, 2010). Additionally, financial plans project the future expenditure of more than two years derived from the strategic documents of the organization. These strategic documents vary in their scope and roles and may include documents on staffing patterns, history of enrolment, and capital needs among many others.
The processes of these two documents also vary. A financial plan often undertakes a financial evaluation seeking to determine loopholes through which funds go into waste, rather than performing their intended tasks. Financial plans thus lead to the renewal of programs that produce positive results.
Ineffective programs are discovered through the help of such plans and are dropped off to pave the way for the valuable ones only. On the contrary, budgeting entails a routine process that undertakes annual expenditure review. Budgeting officers rely on specific directions to determine the spending limits before they can come up with new programs for their enterprises (Mittal, 2010).
The main purpose of budgets is to achieve compliance. This differs from a typical financial plan purpose that aims at achieving fiscal stewardship. Budgets compare revenues with expenditures with a view of matching up the two. This is opposed to the financial planning purpose that makes a projection of the long term sources of funding and how the funds can be used.
As Barrow (2011) asserts, the program effectiveness is also evaluated using the financial plan, while assisting the decision makers to strictly maintain the resources towards attaining the vision of an organization.
The role of strategic management
Strategic management involves making decisions and performing acts to determine how a firm performs (Cole, 2003). Strategic management takes care of both known and unseen events in the future. The main goal of strategic management is to achieve sustainable competitive advantage for the organization ahead of its market competitors.
Organizational strategists rely on strategic management to determine specific objectives before proceeding to attain them. It becomes easier to plan how to utilize the available resources in order to steer the organization towards realizing the goals once the managers have identified the strategic goal. The continuous process provides an avenue for organizational managers to evaluate as well as control the industry and business they are involved in.
This includes evaluating competitors’ potential and establishing goals and strategies to outdo the competition. Managers also need to regularly reevaluate strategies to establish their effectiveness and, where possible, change them to suit the external condition (Cole, 2003).
How budgeting plays an integral role in the financial planning and the strategic management process
Budgets reflect the management’s quantifiable manifestation about the goals and plans of the company over the future period. The organizational budget thus helps in allocating the resources of the organization in order to enable it to achieve the desired goals and objectives. Budgeting plays the critical role of allocating the limited resources in order to sustain different organizational goals and objectives since resources are often scarce (Fabozzi & Drake, 2009).
The budgeting process provides management with a cue to determine and undertake a review of the implications of an organization’s cash flow. This also helps in other important roles, such as conducting inventory planning and drawing up of the balance sheet (Fabozzi, & Drake, 2009). It is not possible for any organization to assess its financial position or determine the respective needs of borrowing without conducting a budget process.
Budgeting supplements the strategic planning of an organization. Strategy development is important in enabling an organization to build its own competitive edge over its rivals in the market. As the managers come up with the strategic plan, budgeting enhances their efforts by specifically allocating resources to the plans. Thus, allocation of resources eventually helps the management to achieve its intended target.
With market conditions constantly fluctuating, it is difficult for an organization to cope with the situation unless it has a budget in place. Thus, financial budgets enable the organization to speed up the goal attainment process under uncertain market conditions. Through budgeting, organizations identify the risks lying in wait and effectively adopt measures to minimize them (Fabozzi & Drake, 2009).
Conclusion
Financial plans differ from budgets in many aspects, including their respective time duration, process as well as purpose. Budgets are short lived, and often, their focus lies within a range of two years. Financial plans, on the other hand, focus on a long term period extending up to five years.
Budgets are also tactical, as opposed to the strategic nature of financial plans, and their main purpose is compliance contrary to the fiscal stewardship of financial plans. As a strategy, financial plans seek to identify sources of funds and determine avenues through which such funds can be utilized effectively to the benefit of the organization.
References
Barrow, C. (2011). Practical financial management: a guide to budgets, balance sheets and business finance. London: Kogan Page
Cole, G. A. (2003). Strategic management. Belmont, CA: Cengage Learning.
Fabozzi, F. J. & Drake, P. (2009). Finance: capital markets, financial management, and investment management. Hoboken, NJ: Wiley
Mittal, R. K. (2010). Management accounting and financial management. New Delhi: V.K. Enterprises