What Is the Difference Between Managing a Budget vs. Managing Profit & Loss?
Original post by Wanda Thibodeaux of Demand Media
Financial management is complex, so you will need more than one approach to make your money work for you. Two of the most basic types of financial management to use are budget management and profit and loss management. There is a difference between these two types of management, but because they are connected, you must use them together.
When you manage a budget, look at all of the assets and expenses you have. Additionally, the goal of budgeting usually is to keep from spending beyond a certain point and avoid debt acquisition. Managing a budget is the same as creating a financial strategy or set of financial instructions you want to follow -- when you manage a budget, you adjust your strategy. By comparison, managing profit and loss is concerned with controlling the specific factors that result in budget variance. To do this, you have to engage in particular activities, such as shifting funds from one account to another, or purchasing less expensive goods.
When you manage a budget, the budget remains fairly static, although you can adjust the budget strategy if necessary. When you manage profit and loss, however, what you are doing is not constant. For example, during the first part of the month, you may find that you're spending too much on fast food and subsequently start making dinner at home. During the latter part of the month, you may pay bills that are due so as not to incur fines and decrease your discretionary income. Because you typically do not need to adjust your budget strategy every month, profit and loss management takes more time than budget management.
When you review your budget, you do so in order to decide whether another strategy might be better for your finances. The objective is to set new financial goals. When you review what you've done through profit and loss management, however, the objective is to determine how close the activities in which you've engaged have brought you to your financial goals.
Although budget management and profit and loss management are two distinct financial activities, they are intertwined. Profit and loss management is what makes your budget work. When budgets fail, it's usually because the original budget strategy was not realistic, or that profit and loss management activities were not effective enough. If you do not want to change your budget strategy but are having financial issues, you have to approach profit and loss management more aggressively.
- Economicswebinstitute.org; Profits; Valentino Piana; 2004
- Dacomp.com; Household Budget Management; 2011
About the Author
Wanda Thibodeaux is a freelance writer and editor based in Eagan, Minn. She has been published in both print and Web publications and has written on everything from fly fishing to parenting. She currently works through her business website, Takingdictation.com, which functions globally and welcomes new clients.
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