Financial Planning 1

Introduction and Budgeting

Learning Objectives

Understand the importance of linking planning and budgeting

Understand key financial planning terms and concepts Apply tools and techniques for preparing a financial plan

Definition
Goal/ Objectives

Strategy & Strategic Interventions

Activities & Subactivities

Financial Plan
A detailed year-by-year estimate of the revenues and expenses entailed by the strategic plan

Financial Planning
It represents the planned activities of a
system in terms of money

Financial plans detail the systems estimate

of how much each activity will cost for a specified time period, usually 3-5 years

Financial plans detail the expected income

that will pay for the planned activities

Financial Planning

Helps a program take into account available and potential financial resources for initiatives Identifies resource allocation issues inherent to the strategic planning process

Implementation and Financial Plan

Implementation Plan Annual Budget Financial Plan

Planned activities & subactivities 5 years

Required inputs Detailed Cost of inputs estimates of cost & revenue Projections Sources of revenue for Year 1 3-5 Year Plan

Planning & Budgeting

Planning and budgeting are linked activities:

Plans include goals and objectives that are to be accomplished in a stated time period

Plans describe activities to accomplish the goals

Planning & budgeting are parts of an iterative process

Initial plans may have to be changed depending on whether funds are available to pay for the activities

Financial Planning Involves

Identify resource requirements Analyze current & potential sources of revenue Budget Estimate revenue & expenses

Prioritize resource use

Financial Planning & Budgeting Are Important

Define in monetary terms the strategic plan Provide a basis for evaluating financial performance Provide a tool for controlling costs Force implementers to think through how much each activity will cost Give implementers information on projected expenses and the funds needed for planned activities

Budgeting: Terms & Definitions

Expenses: All of the costs incurred in operating a program The Operating Budget is composed of

Expense Budget based on converting resource needs identified in the planning process into money estimates

Revenue Budget based on identifying sources of funding. Examples: service fees, grants, donor funding, government funds

Budgeting: Terms & Definitions

Asset anything that has value that helps an organization conduct business. Examples: cash, equipment, supplies, etc. Current Assets assets used within the space of a year, such as cash and supplies Fixed Assets assets that have a useful life of longer than a year, such as land, buildings, and equipment

Budgeting: Terms & Definitions

Fixed Costs costs that do not vary with the volume of services provided, such as rent and insurance Variable Costs costs that vary according to the volume of service provided or people served. Example: medical supplies Semi-variable or Semi-fixed Costs costs that increase or decrease with volume but not in a directly proportional relationship

Budgeting: Terms & Definitions

Cost/Volume Relationships:
Cost Cost

Volume
Fixed Variable

Volume

Budgeting: Terms & Definitions

Direct Costs - costs that are identifiable with a specific service. Example: contraceptives for FP services Indirect Costs (Overhead Costs) costs not directly linked to a specific service. Example: utilities, salaries of administrative staff

Incremental Costs costs of adding or implementing additional projects or programs to existing services

Budgeting: Terms & Definitions

Joint Costs resources used for more than one
intervention. Examples: costs of clinic resources, salaries, equipment, exam table

Non-joint Costs (Direct Costs) resources that

are directly linked to the service provided such as the cost of contraceptives for FP services

Budgeting: Terms & Definitions

Allocation of Costs costs that are systematically allocated among products, departments, or programs. Example: salaries of providers working on two different programs on the basis of time Capital Cost costs incurred when acquiring, constructing, or renovating fixed assets Recurrent Costs costs associated with inputs that will be consumed or replaced in one year or less. Examples: salaries, maintenance, medicines

Budget Process

Who should be involved in the financial planning and budgeting process?

MOF MOH MOP Other

key stakeholders

Financial Planning Process

Goal & Strategy List Planned Activities Identify Inputs Quantify Inputs

Prepare Budget for Year 1

Identify New Inputs, Years 2-3

Assign Monetary Values

Collect Cost Information Prepare Financial Plan, 3-5 Years

Make Projections

Steps in Budgeting
1. Resources (inputs) are specified to accomplish activities 2. Costs (expenses) are assigned to resources

3. Sources of funding (revenues) are estimated to finance the activities 4. Compare revenue and expense projections

Steps in Budgeting
1. Resources (inputs) are specified to accomplish activities
Staff (type and number) Supplies (how many? what kind?) Equipment (what type?) Communications Travel (frequency, who travels? etc.) Other resources

Steps in Budgeting
2. Costs are assigned to resources

Use objective sources for estimating costs:

Consult commercial suppliers

Check the amounts spent the previous year for similar items (factor in inflation)
Contact hotels and transportation sources for costs of travel and per diem DO NOT GUESS ABOUT THE COSTS

Steps in Budgeting
3. Sources of funding (revenues) are estimated to finance the activities

Government funds?

Donor funding available?

Service fees? Are fees being charged currently? Grants available?

Steps in Budgeting
4. Compare revenue and expense projections

If expenses do not equal revenues, activities may have to be adjusted If expenses need to be reduced, a fixed percentage cut across all expense line items is not necessarily the most effective remedy Fixed costs will have to be paid regardless, but variable costs can be changed

Budgeting Tips

Salary determine annual salary package

including all fringe benefits

Fees include budget amounts for infrequent

fees, such as annual audits and staff training

Building Operating Costs include minor

repairs, renovation, janitorial services, and maintenance

Vehicle Operating Costs include budget

amounts for fuel, maintenance, and repairs

Budgeting Tips

Travel and Per Diem Expenses estimate

amounts for airfare, taxis, fuel, mileage, per diem and out-of-pocket expenses

General Administrative Expenses (Overhead Expenses) include office

equipment rental, maintenance and minor repairs, data processing, copying and printing costs, office supplies, and insurance

Budgeting Tips

Medical Supplies and Expendable Low-cost Equipment estimate, based on the number of
clients projected to be served in the budget year, gloves, contraceptives, infection control supplies

Fixed Assets include budget amounts (Capital

Budget) for any fixed assets to be purchased in the budget period: land, buildings, and equipment

Budgeting and Long-range Financial Planning

Prepare detailed budget for Year 1

Identify, quantify, and cost new inputs for Years 2 and 3

Make projections
Adjust for inflation Prepare detailed financial plan Review and revise it periodically

Financial Monitoring
Expenditures Compared to Budget Report

Monitors actual expenditures of the program against the planned expenses Analyzes the results of the operation with the planned activities Modifies activities to achieve goals and objectives