Planning and Budgeting

 

Two very important functions of financial management are planning and budgeting. Planning is the process of laying out a plan of action that you intend to follow for the upcoming year or other period. An example of a simple plan would be to increase sales by 15% by developing a more targeted advertising campaign. Plans are used as guidance for managing your business and are used as tools of measurement that can show you how well you did at achieving your goals.

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Budgeting is the process of predicting financial transactions for the upcoming year or other period. Budgeting is also used to manage the financial picture.  Historical data is used to predict income and expenses. When there is no historical data educated assumptions and predictions must be used to begin with. As the period move on budgeting is compared to actuals and adjusted if necessary. Cash flow may also be looked at and cash on hand adjusted as necessary.

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An example of budgeting for a social club that collect yearly dues might appear as follows.

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Historically, Membership has averaged 118 members paying dues every year. This year’s dues are $30 per member. Expenses have averaged $2680 for the past years and we anticipate the same for the upcoming year. The club has $4,580 in the bank account The expected income would be 30 x 118 = $3,540. Deducing the anticipated expense of $2680 would add an additional $860 to the bank account. In looking at this budget we can see that the club is building up excess funds. If the club has foreseeable need for these funds in the near future then nothing needs to be done. If, however there is no foreseeable added expense, this club could easily do a dues reduction or it could choose to increase expenditures for the betterment of the membership.