The Difference between a Budget and a Holistic Financial PlanIt may seem like playing with words or ‘splitting hairs’ to distinguish between these two ideas, but they really are worlds apart. This video may help explain the difference…
To play Video Clip, just click once on the play icon. (If you have slow internet connection such as Satellite or dial up then you may need to press pause for a minute to allow streaming of clip for a continuous viewing)In summary, the major differences are:
1. Planning financial outcomes
A conventional budget is an excellent method of planning the financial outcome required.
When developing a Holistic Financial Plan many aspects of a conventional budget are retained. What is added is the holistic decision-testing process. The benefit is confidence about the short and long-term ecological and social soundness of the financial decisions inherent in the plan.
2. The difference between ‘Capital expenditure’ and ‘Wealth generation’ expenditure
A conventional budget usually treats every purchase of capital equipment as ‘capital expenditure‘. This applies whether it is a replacement motor vehicle, tractor or other plant, or whether it is a brand new piece of equipment/infrastructure that didn’t exist in the resource base before.
In Holistic Financial Planning, replacement items such as a replacement vehicle or tractor, or a replacement piece of equipment, are regarded as doing nothing more than ‘maintaining’ the current level of business activity. They are regarded as ‘M’ or Maintenance expenses.
If the purchase introduces a piece of plant or equipment, or a building that does not currently exist, it is a ‘W’ or Wealth Generation expense. It is normal to commit to a ‘W’ expenditure after testing the action, when it proves to be the one yielding the highest ‘Marginal Reaction’ at addressing the ‘Financial Weak-link’ of the business.
The result of a ‘W’ expense is business growth, and new wealth that did not previously exist, and could not be generated with the current level of investment.
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