A financial plan shows what your total expenditure is likely to be and when money will be needed to achieve the organisation's strategic goals and objectives. A financial plan may include:
- budget forecasting - income and expenditure for the next 12 or more months
- a cash flow forecast - a monthly breakdown of money coming in and going out (receipts and payments), including the opening and closing bank account balances.
The financial planning process can be undertaken in six steps:
- determining the organisation's current financial situation
- developing financial goals
- identifying alternative courses of action
- evaluating alternatives
- creating and implementing a financial action plan and
- reevaluating and revising the plan.
A budget helps the organisation with financial planning and control of inflows and outflows of cash and also the overall financial position.
A budget can be prepared in a spreadsheet, either electronically or manually. The treasurer usually has the key role in preparing the budget, but they will need to work closely with the other members of the organisation. Once the budget has been approved, it should be added to your accounting system to ensure the organisation can compare it against actual income and expenses. If you use a cash book accounting system (either a computer spreadsheet or a manual cash book), it is still important to compare the actual financial performance with the budget (see Monthly reporting later in this section).
To prepare a budget:
- start with your actual income and expenditure from the previous year (or two years if this is available) - new groups will have to start with their best guess of what to expect
- add your likely payments and potential income for the coming year
- adjust and modify until you have a realistic and reasonable budget
- get the budget approved by your management committee or governing body.
TIP: You may want to start with your planned expenses to calculate the total cost. You can then focus on what income and funding you'll need to cover that total cost.
Cash flow forecast
It is important to do some cash flow forecasting throughout the year so you can predict when there may be peaks and troughs in your income. Planning your activities around these fluctuations will help ensure that you can meet monthly fixed costs (e.g. wages) when your income is not coming in regularly. By cash flow forecasting, you can also maximise interest earnings from investments by investing your money until it is required to pay for something.
To prepare a cash flow forecast:
- use the budget (prepared above) and break it down month by month
- add in your organisation's opening bank balance
- add in your organisation's estimated outgoings - bills, salaries etc and
- calculate a closing balance.
How to use your forecasts
Cash flow forecasts are an important tool for all organisations.
You can use forecasts to:
- avoid financial trouble
- plan for future cash shortcomings
- meet your tax obligations
- plan asset purchases
- plan for growth or expansion
- make an informed decision on whether borrowing is right for your organisation
- benchmark your performance
- test different strategic scenarios
- figure out the best time to invoice
- build your case for investment
- forecast the cost of taking on more employees.