BUDGETING

2010

Budgeting

Budget• A plan for wise spending and saving of money

based on your disposable income and costs of living (expenses).

PurposeA budget allows you to:• organize and control your financial resources;• set and achieve goals;• make your money work for you.

Organize and Control Your Financial Resources

1. Allows you to know what income you have and how much you need for necessity/living expenses and have left over for discretionary shopping.

2. Prevents over spending and going into debt, hurting a credit, and worst case scenario, bankruptcy.

3. Encourages wise shopping and smart purchases

4. Allows you to be and feel in control of your life and ready to plan for future dreams and goals.

Set and Achieve Your Goals

Long-Term Goals

Planning:

1. to attend College or University

2. to own your dream car3. for a down payment on your

first home4. for a family5. for a dream vacation6. for annual holidays7. for your children’s future

education8. for a comfortable retirement

to be able to do things you would like.

9. for emergencies

Short Term Goals

Planning:

1. To buy an ipod2. To buy a phone3. To purchase a gift4. To purchase a new fancy outfit5. To go on a holiday

Make Your Money Work For You

Types of BudgetsA budget can be:• as simple or as complicated as you want;• daily, weekly, monthly, annually

A budget takes into consideration:• all income you receive (wages, salaries, an allowance,

etc)• your living expenses, financial goals, savings, and

discretionary desires.• allocating all your income and not having any leftover.

Note: Wise financial planning will include allocating/placing 10% of your income into savings.

Preparing Your Personal Monthly Budget

Step 1 • Calculate your monthly disposable income (take-home pay) + any other regular income your receive.

Step 2 • Calculate your expected living expenses, goals, and

discretionary item amounts.• Fixed expenses occur regularly and cannot be adjusted.

(i.e. mortgage payments, phone bills, car payments, insurance payments)

• Variable expenses differ from one month to another. (i.e. clothing, food, personal care, entertainment, savings)

Your Personal Monthly Budget

Step 3• Review your budget

• Compare your budget with your actual spending habits using bills, receipts etc.

• Determine if you are overspending Your total expenses exceed your income.

• What adjustments can you make in your budget and how might you alter your spending habits to follow your budget?

Your Personal Monthly Budget

Step 4• Record and review your

spending for several months to determine your spending habits.

• Are you able to increase your savings, cut back in certain areas to follow your budget?

• If your income increases, how might this change your budget?

Monthly Budget Example

IncomeGross Income $ 6 542Income Tax, CPP, EI (2 583)Disposable Income $ 3 959

ExpensesSavings $ 650Mortgage 1800Car Payment 400Car Insurance 70House Expenses (Heat, Hydro, Phone, Ins.) 300Groceries/Personal Items 400Clothing 150Total Necessities $ 3770Discretionary Income 189Entertainment and Gift -120Additional Clothing - 69Leftover Income $ 0

Business Money Management

How business budgeting differs from personal budgeting

1. Business’ want as much money left over as possible which is called a net profit or net income.

2. Business’ spend money to make money

(launching a new product, advertising, etc)

Types of Business Income

1. Revenue

• The amount of money collected for the goods and services provided to customers.

• May include investment income if company has some of its money tied up in investments

2. Gross Income/Gross Profit• Total amount of money the business

receives minus the cost of the goods the business sold.

• Calculated for a merchandising business

Example:Loblaws sold 1 bag of milk at $5.00Less: Cost to Loblaws for milk 2.00Gross Income/Gross Profit $3.00

Types of Business Income

Type of Business Income

3. Net Income/Net Profit• Gross income/profit minus the expenses needed

to operate the business. (i.e. heat, insurance, advertising, wages, etc)

Example:Loblaws sold 1 bag of milk at $5.00 … Revenue

Less:Cost to Loblaws for milk 2.00 … Cost of Good Sold

Gross Profit/Income $3.00 … Gross Profit

Less: Operating Expenses 2.00 ... Operating Expenses

Net Income/Profit 1.00 … Net Income/Net Profit

Budgeting for a Business

1. Start-Up Budget• Outlines the money needed to start and open a

business. (i.e. money for a building, furniture, equipment, computers, inventory, etc)

• Start up money (capital) is necessary to cover more than a year until revenue is generated.

• Start-up expenses must be estimated carefully in order to acquire enough start-up capital to carry the business until it starts to generate enough of its own revenue through sales.

Budgeting For A Business

2. Operating Budget• Outlines the revenues and expenses of a company on a

monthly, yearly, or project basis.

Examples of Business Revenue• Sales (merchandise)• Membership fees (Costco or Golf Club)• Fees earned (lawyers, dentists)

Examples of Operating Expenses• Rent• Insurance• Wages and salaries• Advertising• Hydro

Setting Business Goals

Examples of company goals made by management

1. Launch a new product2. Expand internationally3. Increase research and development4. Close down a division5. Cut expenses by a certain amount6. Increase sales by a certain amount

Note: Goals must be measurable in order to budget accordingly. For example, expenses must be cut by 30%. If total expenses were $100 000. How much needs to be cut?

• $30,000 = (100,000 * .30)

Preparing a Business Budget

Step 1• Calculate the amount of expected income.• This estimate may be based on: a. previous years revenues b. market research results c. state of the industry or trends d. state of the economy e. a combination of all of the above.

• In a business budget, projected income is called revenue.

Preparing a Business Budget

Step 2• Calculate expected expenses.• This estimate is based on known fixed expenses

such as rent, insurance, salaries, etc.• Variable expenses such as utilities, advertising,

bank charges, cost of goods sold may be calculated based on previous years amounts, company financial and business goals, state of the economy, industry, etc.

Preparing a Business Budget

Step 3• Calculating the amount left

Revenues

- Cost of Goods Sold

= Gross Profit

- Operating Expenses

= Net Income/(Loss)

Note:

The goal of the business budget is to have the highest possible net income.

Preparing a Business Budget

Step 4 • Review your budget• Compare your budget with actual revenues and

actual expenses• If business is spending more than it is earning

what might it do to adjust the budget?– cut back on expenses, raise or lower prices to

increase sales, spend more in advertising, lay off employees.

Example of a Monthly Business Budget

Revenue $25 000Cost of Goods Sold 7 000Gross Profit $ 18 000

Operating ExpensesSalaries 6 000Wages 2 000Rent 1 500Telephone 100Utilities 500Insurance 800Delivery Truck Maintenance 600Advertising 700Interest and Bank Charges 500Supplies 500Total Operating Expenses 13 200Net Income $ 4 800

Source

• Wilson, Jack et al. The World of Business, 5th Ed., Nelson Education Ltd., Canada, 2007