You may be wondering what the difference is between a business plan and a budget. It is actually very simple.
First, let’s see what the budget and the business plan have in common.
Common Points Between Budget And Business Plan
There are two things in common between a business plan and a budget.
The first common point is that both are the result of a reflection on the future of the company.
The second point in common is that both include a financial forecast developed by the management of the company. For the budget as for the business plan, the financial forecast constitutes an objective taken by the management towards the financial partners of the company (banks and investors).
Now let’s see what the differences are.
Differences Between Budget And Business Plan
There are three basic differences between a budget and a business plan: scope, time horizon, and level of detail.
The budget is limited to the financial forecast while the business plan includes a reflection on the market, the organization, and the strategy of the company for the years to come. The scope of the business plan is therefore much broader than that of the budget.
The time horizon
The time horizon of the two documents is also very different: the budget is a short-term financial forecast, usually over 12 months, while the business plan contains a medium-long-term financial forecast, usually over 3 or 5 years.
The level of detail
The last difference between the two documents is the level of detail.
The budget is very detailed, each planned expense is listed in detail. The business plan is much more vague: it focuses on the broad masses.
This is partly explained by the difference in time horizon between the two documents.
Indeed, with the exception of new companies, the visibility on the future of the company at 12 months is generally quite good: the management can use the results of the previous year as a starting point and simply add the effects of inflation and the commercial action plan planned for the new year.
The visibility on the future of the company in 3 or 5 years is on the other hand much more vague. Market demand can change, competitors can change their commercial positioning, regulation can change, etc. In this context, it is impossible to predict with precision what will be the financial performance of the company.
This is why the financial forecast of the business plan generally consists of the budget for the next year and an extrapolation of the trend over the coming years.
There you go, now you know the difference between a business plan and a budget.