BUDGETING 2010

Budgeting Budget A plan for wise spending and saving of money based on your disposable income and costs of living (expenses). Purpose A 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 your credit rating, 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 Short Term Goals Planning: To buy an ipod To buy a phone To purchase a gift To purchase a new fancy outfit To go on a holiday Long-Term Goals Planning: 1. to attend College or University 2. to own your dream car 3. for a down payment on your first home 4. for a family 5. for a dream vacation 6. for annual holidays 7. for your children’s future education 8. for a comfortable retirement to be able to do things you would like. 9. for emergencies

Make Your Money Work For You

Types of Budgets A 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 Income Gross Income $ 6 542 Income Tax, CPP, EI (2 583) Disposable Income $ 3 959 Less 10% Savings 650 Net Disposable Income $3 309 Expenses Mortgage 1 800 Car Payment 400 Car Insurance 70 House Expenses (Heat, Hydro, Phone, Ins.) 300 Groceries/Personal Items 400 Clothing 150 Total Necessities $ 3 120 Discretionary Income (Net Disposable – Necessities) 189 Entertainment and Gif -120 Additional Clothing - 69 Leftover Income $ 0

Business Money Management

How business budgeting differs from personal budgeting 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

Types of Business Income 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 $5.00 Less: Cost to Loblaws for milk 2.00 Gross Income/Gross Profit $3.00

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 Launch a new product Expand internationally Increase research and development Close down a division Cut expenses by a certain amount 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 $25 000 Cost of Goods Sold 7 000 Gross Profit $ 18 000 Operating Expenses Salaries 6 000 Wages 2 000 Rent 1 500 Telephone 100 Utilities 500 Insurance 800 Delivery Truck Maintenance 600 Advertising 700 Interest and Bank Charges 500 Supplies 500 Total Operating Expenses 13 200 Net Income $ 4 800

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