Budgeting

Financial Planning

Both Businesses and Households need to engage in Financial Planning. They need to plan their inflows and outflows. They do this by making Cashflow Forecasts and Household Budgets respectively.

Headings in a Cashflow Forecast

• Receipts: This consists of all cash and credit sales, as well as other money (Such as rental income) the company plans to receive in a month.
• Payments: This consists of all expenses and outgoings the company plans to have each month.
• Net Cash: Receipts minus Payments. If Payments is larger than Receipts then Net Cash will be negative.
• Opening Cash: The amount of cash a company has available at the start of a month.
• Closing Cash: Net Cash plus Opening Cash. This is the amount of money a company has available at the end of a month.

Reasons for a Cashflow Forecast

Businesses prepare Cashflow Forecasts for a variety of reasons:

1. Improve financial control
2. Access Finance
3. Highlight deficit/surpluses

---

4. Improve financial control: A cashflow forecast provides a clear view of incoming and outgoing funds. This allows better management of expenses and planning for future investments.
5. Access Finance: Lenders and investors often require a cashflow forecast to evaluate a business's financial health. A well-prepared forecast can improve the chances of securing loans or attracting investment.
6. Highlight deficit/surpluses: A cashflow forecast helps identify periods of cash shortfall or surplus in advance. This allows for timely adjustments in spending or planning for future growth opportunities.

Reasons for a Household Budget

Households prepare Budgets for a variety of reasons:

7. Tracking Spending
8. Achieve Financial Goals
9. Identify periods of deficit

---

10. Track Spending**:** A household budget helps monitor where money is going. It allows individuals to see how much is being spent on essentials versus non-essentials, leading to more informed spending decisions. Individuals can also compare planned spending to actual spending in order to plan for future budgets.
11. Achieve Financial Goals: By setting and adhering to a budget, households can allocate funds towards savings and specific financial goals. This can include saving for a holiday, buying a home, or building an emergency fund.
12. Identify Periods of Deficit**:** A household budget helps pinpoint when expenses may exceed income. Recognizing these periods early allows for adjustments in spending or finding ways to increase income.

Dealing with Deficits

Businesses and Companies can deal with deficits by:

13. Raising income
14. Reducing expenditure
15. Applying for finance

---

16. Raising income: An individual may ask their employer for a raise and a company may increase the cost of their products. This can result in income becoming larger than expenditure, turning a deficit into a surplus.
17. Reducing expenditure: Deferring large expenses or lowering costs can allow companies and individuals to avoid deficits.
18. Applying for finance: Companies and individuals can apply for a loan, providing them with extra cash to avoid a deficit.