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Words matter. Most of the time "planning" and "budgeting" are used as synonyms, but in fact they mean two different things. A plan (partly from the old French for a foundation) is a detailed formulation of a program of action or an orderly arrangement of parts of an overall design. A budget (also from an old French word, for a leather purse) is a statement of the financial position of an administration for a definite period, based on estimates of expenditures during the period and proposals for financing them. From a Performance Management standpoint, the purpose of planning is to set objectives in a coordinated fashion to support the company's strategy, and to create a framework and criteria to assess success or failure in achieving those objectives. The purpose of budgeting is to apportion resources.

Which does your company really do and do well? Ventana Research advocates placing the emphasis on planning; we recommend using the process as a management tool to align resources with objectives and strategy. Yet many companies do not make planning an explicit part of their strategizing. Too often, senior management sets high-level objectives that are expressed mostly in financial terms - in other words, they budget. Business units then negotiate their revenue targets and shares of resources. Budgeting in this sense quickly becomes an adversarial game of divide the pie.

In contrast, from our perspective, planning involves setting explicit objectives that typically are a combination of unit and volume measures and financial metrics. Ideally, it should include purely external goals (such as "increase market share two points"). These goals, cascaded down through the organization, should translate into activities ("run a marketing campaign to generate 1,500 leads") needed to achieve the objectives and an assessment of the resources required to fund the activities. The objective is to use the planning process to enhance a company's effectiveness.

There is nothing inherently wrong with simply budgeting. Companies that operate in a relatively stable environment with a stable business model and a relatively high percentage of shared costs may feel no urgency to change the process, particularly if they have a status-quo management culture. On the other hand, corporations confronting a challenging environment and a changing business model and that have distinct business units and cost structures should instead be planning, particularly if senior executives aim to instill a culture of measurement.

The danger with just budgeting is that it does not enable companies to adapt to change. Just at the point in the business cycle or in the evolution of the competitive landscape when it is critical to be able to alter course quickly, executives who only budget will be challenged to act without having well-developed planning skills to help them. For those companies that continue mainly to budget, we suggest they aim to increase efficiency, spending less time and fewer resources on it.

Assessment

Whether a company decides to plan and budget or simply to budget, we recommend the use of a dedicated software tool to manage the process. In Ventana Research's experience, using stand-alone spreadsheets makes it difficult to plan and use resources effectively in executing a budget cycle. Companies that want only to budget can be far more efficient using a dedicated application designed for that purpose. Choosing the appropriate software involves understanding what your company wants to accomplish with the planning or budgeting process in the years following the purchase. We advise corporations to plan for the future and select a package that best supports both the transition and the desired end state.