Financial Planning 1

1. Financial Planning 1 Introduction and Budgeting

2. 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

3. 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

4. Financial Planning • It represents the planned activities of a system in terms of money • Financial plans detail the system’s 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

5. 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

6. Implementation and Financial Plan Implementation Plan Annual Budget Financial Plan • Required inputs • Cost of inputs • Projections • Sources of revenue • 3-5 Year Plan • Planned • activities & • subactivities • 5 years • Detailed • estimates of • cost & revenue • for Year 1

7. 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

8. Financial Planning Involves… Identify resource requirements Estimate revenue & expenses Analyze current & potential sources of revenue Prioritize resource use Budget

9. 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

10. 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

11. 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

12. Budgeting: Terms & Definitions • Fixed Costs – costs that do not vary with the volume of services provided, such as rent and insurance • Variable Costs – coststhat 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

13. Budgeting: Terms & Definitions Cost/Volume Relationships: Cost Cost VolumeVolume Fixed Variable

14. 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 additionalprojects or programs to existing services

15. 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

16. 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

17. Budget Process • Who should be involved in the financial planning and budgeting process? • MOF • MOH • MOP • Other key stakeholders

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

19. 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

20. 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

21. 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

22. 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?

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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