Financial Planning 1 Introduction and Budgeting

Learning Objectives Understand the importance of linking planning and budgeting Understand the importance of linking planning and budgeting Understand key financial planning terms and concepts Understand key financial planning terms and concepts Apply tools and techniques for preparing a financial plan 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 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 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 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 Planned activities & subactivities 5 years Required inputs Cost of inputs Projections Sources of revenue 3-5 Year Plan Detailed estimates of cost & revenue for Year 1 Implementation Plan Annual Budget Financial Plan

Planning & Budgeting Planning and budgeting are linked activities: Planning and budgeting are linked activities: Plans include goals and objectives that are to be accomplished in a stated time period Plans include goals and objectives that are to be accomplished in a stated time period Plans describe activities to accomplish the goals Plans describe activities to accomplish the goals Planning & budgeting are parts of an iterative process 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 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 Prioritize resource use Estimate revenue & expenses

Financial Planning & Budgeting Are Important Define in monetary terms the strategic plan Define in monetary terms the strategic plan Provide a basis for evaluating financial performance Provide a basis for evaluating financial performance Provide a tool for controlling costs Provide a tool for controlling costs Force implementers to think through how much each activity will cost Force implementers to think through how much each activity will cost Give implementers information on projected expenses and the funds needed for planned activities 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 Expenses: All of the costs incurred in operating a program The is composed of 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. 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 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 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 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 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 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 Cost Cost Volume Volume Volume Volume Fixed Variable Fixed Variable

Budgeting: Terms & Definitions Direct Costs - costs that are identifiable with a specific service. Example: contraceptives for FP services 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 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 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 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 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 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 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 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? Who should be involved in the financial planning and budgeting process? MOF MOF MOH MOH MOP MOP Other key stakeholders Other key stakeholders

Financial Planning Process Prepare Budget for Year 1 Goal & Strategy List Planned Activities Identify Inputs Quantify Inputs Collect Cost Information Assign Monetary Values Identify New Inputs, Years 2-3 Make Projections Prepare Financial Plan, 3-5 Years

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) Staff (type and number) Supplies (how many? what kind?) Supplies (how many? what kind?) Equipment (what type?) Equipment (what type?) Communications Communications Travel (frequency, who travels? etc.) Travel (frequency, who travels? etc.) Other resources Other resources

Steps in Budgeting 2. Costs are assigned to resources Use objective sources for estimating costs: Use objective sources for estimating costs: Consult commercial suppliers Consult commercial suppliers Check the amounts spent the previous year for similar items (factor in inflation) 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 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? Government funds? Donor funding available? Donor funding available? Service fees? Are fees being charged currently? Service fees? Are fees being charged currently? Grants available? 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 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 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 Fixed costs will have to be paid regardless, but variable costs can be changed

Budgeting Tips Salary – d etermine annual salary package including all fringe benefits Salary – d etermine annual salary package including all fringe benefits Fees – i nclude budget amounts for infrequent fees, such as annual audits and staff training Fees – i nclude budget amounts for infrequent fees, such as annual audits and staff training Building Operating Costs – i nclude minor repairs, renovation, janitorial services, and maintenance Building Operating Costs – i nclude minor repairs, renovation, janitorial services, and maintenance Vehicle Operating Costs – include budget amounts for fuel, maintenance, and repairs Vehicle Operating Costs – include budget amounts for fuel, maintenance, and repairs

Budgeting Tips Travel and Per Diem Expenses – e stimate amounts for airfare, taxis, fuel, mileage, per diem and out-of-pocket expenses Travel and Per Diem Expenses – e stimate amounts for airfare, taxis, fuel, mileage, per diem and out-of-pocket expenses General Administrative Expenses (Overhead Expenses) – i nclude office equipment rental, maintenance and minor repairs, data processing, copying and printing costs, office supplies, and insurance General Administrative Expenses (Overhead Expenses) – i nclude 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 – e stimate, based on the number of clients projected to be served in the budget year, gloves, contraceptives, infection control supplies Medical Supplies and Expendable Low-cost Equipment – e stimate, based on the number of clients projected to be served in the budget year, gloves, contraceptives, infection control supplies Fixed Assets – i nclude budget amounts (Capital Budget) for any fixed assets to be purchased in the budget period: land, buildings, and equipment Fixed Assets – i nclude 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 Prepare detailed budget for Year 1 Identify, quantify, and cost new inputs for Years 2 and 3 Identify, quantify, and cost new inputs for Years 2 and 3 Make projections Make projections Adjust for inflation Adjust for inflation Prepare detailed financial plan Prepare detailed financial plan Review and revise it periodically Review and revise it periodically

Financial Monitoring Expenditures Compared to Budget Report Monitors actual expenditures of the program against the planned expenses Monitors actual expenditures of the program against the planned expenses Analyzes the results of the operation with the planned activities Analyzes the results of the operation with the planned activities Modifies activities to achieve goals and objectives Modifies activities to achieve goals and objectives