Financial Planning

Besides accounting, financial planning is a key element of financial management and control. The main purpose of financial planning is to establish a guide for the institution’s management. At each point in time the actual financial situation can be compared against the plan. These comparisons will take place monthly or quarterly and whenever there are major changes in the plans of the institution. Variations need to be analysed and corrective actions taken.

In the "business plan" chapter the guide described how to do the three most important financial forecasts: cash-flow forecast, budget and balance sheet forecast.

Note 12 The financial planning system should comprise:

Before the beginning of the next fiscal year the management together with the staff will have to start thinking about the budget (forecast of expenses and income) for the upcoming year.

a)    plan in detail all programmes and activities for the upcoming year

In order to estimate the overall budget, the management and staff will first need to define which programmes and activities will be carried out in the coming year. This reflection will lead to the operational plans (programme plans) that define in detail which work will be done.

See programme planning

b)    budget and price all programmes and activities

Every activity or programme will have its own budget summarising the directly programme related expense and income projections.

See “programme budgeting & pricing ”

c)    establish the overall budget (income and expense projections)

The overall budget is the sum of the programme budgets plus the general expenses and income (office rent, electricity, water, office material, license fees, administrative staff salary, baseline funding, etc).

General expenses are referred to as fixed cost because they occur even if no activity takes place. Therefore, fixed costs are not directly related to one or more programmes.

Who pays for the fixed cost? Every programme or activity will need to create some extra revenue in order to pay for a share of the fixed costs. Another possibility is to organise for baseline funding, i.e., one or more donors support the survival and existence of the institution and not its specific programmes or activities.

Create your overall budget with the help of the template “overall yearly budget”. The sums for every budget line refer to the programme budget.

Overall yearly budget

d)    forecast cash inflow and outflow

Suitable cash reserves are vital for the existence and survival, especially of smaller organisations. Cash-flow projections and comparisons need to be done on a regular basis. Furthermore, the demonstration of reasonably accurate cash-flow forecasting in action is one of the best ways to encourage donors, banks or other supporters to offer loans or overdraft facilities to cover times of cash shortfall or intensive development expenses.

The cash-balance is calculated by adding all projected cash inflow for, e.g., the first quarter (donor payment, payment for activities, payment of membership fees, etc.) and deducting all projected cash outflow for the same period (rent payment, supplier payment, trainer fee payment, etc.).

Note 13 The difference between income and cash-inflow.

An overall cash gain (cash inflow exceeds cash outflow) is added to the reserves created in the previous period, a cash loss (cash outflow exceeds cash inflow) is deducted from the reserves. The result shows the total cash balance per period. You should always try to maintain a positive cash balance at the end of each period, i.e., cash reserves.

You will have to decide the minimum level of reserves needed to have enough financial flexibility to operate the institution. In the event of a cash squeeze the priority for purchasing and payments should be established at the outset. Furthermore, you will decide what you are going to do in case the minimum level of reserves can not be achieved.

An important factor in this respect are the credit lines that your bank or other supporters may grant you in times of financial need. If you dispose of favourable credit lines (right available, low interest rate) then you might not need to hold extensive reserves, but if credit lines are hardly or only expensively available you will have to ensure the financial survival of your institution with built up reserves.

Establish your cash-budget with the help of a template

Source: UNESCO Tele Center Cookbook for Africa

Why are cash reserves (= a positive cash budget or balance) so important?

l     Invoices may need to be paid before the money to settle them is finally received from clients or donors. This is normally considered in your cash-flow projections but some clients may exceed their payment terms by far more time then you have foreseen.

l     You need reserves for emergencies and financial threats (loss of key staff, loss of key clients or donors, dispute settlements, tax increases, etc.)

l     You might want to benefit from unforeseen opportunities (e.g. you receive an offer to partner with an important institution or to acquire a great tool for little cost, etc.)

Whenever new information or changes influence your cash situation you will have to adapt your cash-flow projections.

Example: “Cash-flow projection review for the 1^st quarter of the year”

The Supply Chain Management support association of country x has projected a cash budget (reserves) for the 1^st  quarter of the year of US$ 3000. The minimum level of reserves to be held was set at US$ 2000. The cash budget includes the donation of a sector association in height of US$ 2500. Due to unforeseen reasons the sector association announced to shorten its funding by 15 % over the next two quarters. Furthermore, the association was offered by the Ministry of Trade to organise an international SCM conference in two months. The estimated expenses for the first quarter are estimated at US$ 1500. The estimated cash inflow of the conference will mount up to 600 US$ for the respective period. What is the new cash budget resulting from these changes?