Budgeting and Forecasting

Budgeting

• Planning and managing finances is to make sure that expenses do not exceed income and available funding.
• It requires establishing financial goals, predicting future revenue and expenses, and deciding how to allocate resources to achieve those goals.
• Ensures spending is under control, savings are maximized and resources are used efficiently that meets short-term and long-term objectives.

Forecasting

• Predicts future financial results depending on data, trends, and assumptions.
• It enables financial managers to plan, make decisions, allocate resources, and manage risks effectively for businesses
• Qualitative relies on judgment, intuition, or market research with limited data, often for new products or markets
• Quantitative uses historical data, math, and statistical models to predict future events.

Types of Budgets

• Operational Budgets plan daily expenses and revenues and manage your day-to-day operations
• Capital Budgets helps you manage and allocate funds for large investments for business
• Cash budgets outlines expected cash inflows and outflows weekly, monthly, quarterly, or annually.

Creating and Managing a Budget

• To create and manage your budget you must list income to know how much you have to spend
• Track and list every expense you have including fixed and variable costs
• Group expenses into categories to see where your money is going
• Set spending goals for each category
• Prioritize essentials and save for emergencies
• Monitor if spending matches the budget and adjust as needed

Techniques for Financial Performance Forecasting

• Trend analysis looks at past data to find patterns for predictions
• Ratio analysis looks at key financial ratios for company health predictions
• Regression analysis uses statistics to find relationships between dependent (revenue) and independent variables to predict future outcomes
• Scenario analysis creates different scenarios to see how factors impact performance
• Budgeting and Forecasting is used to plan future outcomes based on data and expectations using market research and past performance
• Time series analysis uses time-ordered data points for performance predictions
• Delphi Method gathers expert insights to form a consensus forecast

Financial Analysis and Performance Metrics

• Analysis involves evaluating a company’s health by reviewing financial statements such as an income statement, balance sheet, and cash flow statements
• Metrics are used to assess different aspects of a company's performance and to make informed decisions for investment, management, or lending.

Types of Financial Ratios

• Liquidity Ratios show a company's ability to pay short-term debts with enough liquid assets to cover short-term liabilities
• Profitability Ratios show how well a company makes a profit relative to revenue
• Efficiency Ratios indicate how well resources are utilized to generate revenue
• Leverage (Solvency) Ratios show the financial risk and long-term solvency, that assess a company's ability to pay its long-term debts

Financial Ratio Examples

• Current Ratio shows if a company has enough short-term assets to cover short-term liabilities
• Quick Ratio provides a more accurate measure of liquidity by excluding the inventory
• Gross Profit Margin measures profit from selling goods
• Net Profit Margin reflects a company's ability to generate earnings
• Return on Equity (ROE) is a key ratio for shareholders as it measures how well a company's ability to earn
• Return on Assets shows how well a company uses its assets to generate profit
• Asset turnover ratio measures how well a company uses its assets to generate revenue
• Inventory turnover ratio measures how quickly a company sells and replaces its inventory
• Receivables turnover ratio measures how quickly a company collects payments from its customers
• Debt-to-Asset Ratio measures a company's leverage and how much is funded by debt versus assets
• Debt-to-Equity Ratio indicates how a company is funded and how much of the debt can be covered by equity if they needed to liquidate
• Interest Coverage Ratio measures how many times a company can cover its current interest payments with its available earnings

Common Financial Analysis Tools

• Trend Analysis evaluates financial data to identify patterns and assess growth stability or areas of concern
• Comparative Analysis compares financial statements to evaluate performance
• Common-Size Analysis converts statements into percentages to analyze changes
• DuPont Analysis breaks down Return to identify drivers of profitability
• Ratio Analysis utilizes various ratios to evaluate financial performance
• Break-Even Analysis determines when revenue equals costs to understand company expenses

Importance of Financial Ratios and Analysis Tools

• Provides insight into financial performance
• Aids decision-making for stakeholders
• Compares performance with industry standards

Key Performance Indicators (KPIs)

• KPIs provide targets for teams, gauge progress, and insights, that helps an area of business forward successfully
• KPIs align teams, check health, help you adjust, and make teams accountable
• Strategic monitor organizational goals, for executives
• Operational measure performance in processes and efficiencies
• Functional are tied to specific functions that can be classified as strategic or operational
• Leading predict outcomes and Lagging track what has occurred

Benchmarking Financial Performance

• Evaluates financial metrics compared to industry, competitors, and history to identify strengths, weaknesses, and opportunities
• To Benchmark you must Define Objectives, Select Benchmarks, Collect Data, Analyze Performance, Identify Gaps, Develop Strategies, and Monitor Progress

Cost Control and Profitability Analysis

• Understanding of costs and expenses, break-even analysis, profitability models, and cost-volume-profit (CVP) analysis

Managing Costs and Expenses

• Is to plan, monitor, and control a businesses spending to maximize profitability by identifying areas to reduce costs, setting financial goals, tracking expenditures, and taking corrective actions

Key Aspects in Managing Costs and Expenses

• Budgeting is creating a plan outlining income and expenses
• Cost Tracking is monitoring expenses against the budget
• Cost Analysis examining expenses for potential savings
• Cost Control is implementing strategies to reduce expenses
• Forecasting is predicting future costs to plan for future challenges

Break-Even Analysis and Profitability Models

• Determines when a business will be profitable with insights to minimum sales requirements
• Break-Even Point (BEP) Formula is Fixed costs / (Selling Price per Unit – Variable Cost per Unit)

Key Components of Break-Even Analysis

• Fixed Costs (FC) do not change with output
• Sales Price per Unit (SP) is the selling price unit
• Variable Cost per Unit (VC) is the variable cost to create a unit
• Contribution Margin (CM) is sales revenue remaining after covering variable cost or Sales Price per Unit - Variable Cost per Unit

Profitability Models

• Gross Profit Margin reflects how efficiently a company delivers its products
• Calculated using (Revenue - COGS)/Revenue x 100

Operating Profit Margin

• Assesses profitability and deducted operating expenses that indicates how efficiently a day to day operations are managed
• Calculated using (Operating Profit/Revenue)/ x 100

Net Profit Margin

• Percentage of revenue left after all expenses, it shows the business profitability
• Calculated using (Net Profit/Revenue x 100)

Cost-Volume-Profit (CVP) Analysis

• A tool to understand the relationship between costs, volume, and profits to make decisions about pricing, production, and sales volume

Cost

• Variable changes in proportion to sales like raw materials, sales commission, or packing
• Fixed does not change, such as salaries, Rent or mortgage payments and insurance
• Volume is Quantity of unit sold or produced
• Profit is the difference of sale and cost using Sales variable cost
• Break-even Point is when business revenue equals total costs and is not making a profit or loss

Internal Controls

• This ensures accuracy and prevent fraud, authorization is required, and a segregation of duties should be applied
• Accurate records, regular checks and compliance
• Risk Management is the process of identifying and managing potential risks to prevent harm
• Accuracy ensures reliable data. Trust builds confidence. Stability protects against unexpected issues

Internal Controls are Important for

• Facilitates risk management and supports audit processes
• Enhancing accuracy and reliability
• Safeguarding assets and promoting operational efficiency
• Builds stakeholder confidence and ensures compliance

Designing and Implementation of Control Systems

• Aligning with strategic goals with business and stakeholder requirements
• Identifying risks with comprehensive analysis of financial processes
• Risks can include operational, financial, technology and compliance
• Designing with Preventive and Detective Controls

Preventive Controls

• Prevention is done by splitting personnel responsibilities, and authorization protocols should be established

Detective Controls

• Reconciliations and variance analysis

Control Systems should

• Be Simple, Technology should be utilized and have easy and Scalable implementation

Monitoring

• This Requires Real-Time tracking and Evaluation

Financial Risks include

• Market Risk , Credit Risk, Liquidity Risk, Operational Risk, and Legal Risk

To Mitigate financial Risk one must

• Avoid, Reduce, Transfer, or Accept Risk and use Internal controls to identify, assess and monitor to prevent errors, fraud and financial misreporting that foster transparency and reliability

Compliance

• Compliance with laws, regulations, standards, and internal policies and must adhere ethically in line with financial standards
• Financial regulations are legal rules to maintain stability, and reduce risk
• The purpose of Financial Controllers is to ensure all Requirements are followed, abided, and maintained with accurate and ethical Reporting

Overview of Financial Regulations.

• GAAP (Generally Accepted Accounting Principles) is a set of accounting standards, principles, and procedures that are required to be followed when preparing financial statments
• IFRS (International Financial Reporting Standards) global framework for financial reporting that is principles based with transparency a that are consistant across international markets
• Sarbanes-Oxley Act (SOX) (2002) It enhances corporate governance and accountability in response to financial scandals

Compliance with Tax Laws and Reporting Standards

• Compliance with tax laws refers to individuals, businesses, and other entities adhering to the rules and regulations set by the government
• Reporting standards provide standards for what a company should report on

Ethical Responsibilities of Financial Controllers

• Integrity and Honesty that all financial records and statements are accurate, truthful, and free from misrepresentation or fraud
• They must Maintain confidentiality, objectivity and judgment
• They must Follow all Laws and must be accountable
• Avoid all Conflicts of Interest and have Due Care and Ethical Leadership