Financial management

There are two primary purposes of financial management. The first is for internal management purposes allowing you to closely monitor your financial performance and make decisions accordingly. The second is for external reporting. Both of these are explained in more detail in this section.

Financial management can be separated into 4 areas;

• Budgets or forecasts: Created in advance of starting your project and then in advance of every financial year.
• Record keeping & Business Performance: Monitoring your performance against your budgets/ forecast.
• Financial security: including cash handling and protecting yourself from fraud.
• Recording and reporting (external).

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Budgets

Budgets are also known as forecasts. A Start-up Budget is an itemised list of expenses for a new business/project, which often covers the period up to commencing operations and perhaps a small amount of time after operations have commenced. These costs are not covered by income and funding will need to be sought.

Examples of the items this budget is likely to include are:

• Premises/ lease/ mortgage
• Licences
• Equipment
• Training
• Marketing
• Start-up stock
• Transport
• Insurance
• Working Capital (cash needed to pay for your project to operate before you generate income).

Download an Example start up budget.

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Profit and loss budget

This is also called an income and expenditure budget.

A Profit and loss budget (or forecast) is a formal statement of estimated income and expenses based on future plans and objectives for a time period, usually 12 months. In other words, a budget is a document that management makes to estimate the revenues (income) and expenses for an upcoming period based on their goals for the business. For an established business/ project the budget is usually based on the previous year’s actual income and expenditure but may include new elements like new projects, growth or new expenditure.

Examples of income items include:

• Sales (unrestricted income)
• Grants (restricted income)
• Loans
• Cash donations

Examples of expenditure items

• Cost of sales (or direct costs), i.e. the costs of a product you might be selling
• Wages
• Rent & rates
• Utilities
• Telephone and internet
• Insurance
• Marketing
• Vehicle
• IT / professional support

Download our Profit and loss example spreadsheet.

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Cash-flow forecast

Cash flow refers to the movement of money in and out of your business, including money in the bank or cash in hand. You need to have a positive cash flow – meaning that more money is coming in to the business than is going out.  A positive cash flow allows your business to pay bills and invest in growth.

A negative cash flow means you’ll need to find an alternative source of income to be able to pay off debts.

Consider how long it takes for you to get paid and how long you have to pay suppliers. Your cashflow can be shown on your profit and loss forecast.

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Recording against budgets

This is the process of inserting your actual income and actual expenditure against those you predicted in your budget in order for you to identify variances or differences. 

Variances like increased sales, increased grant income or reduced costs can be positive variances but lower than anticipated sales and higher than anticipated expenditure can be concerning variances that need to be investigated and addressed.

Download our Food project example profit and loss with actuals spreadsheet.

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Breakeven

Breakeven is when income is equal to expenditure. It is essential that you understand your breakeven point and can translate this into a clear sales or income target.  For projects that are fully grant funded this is simpler, as expenditure cannot exceed the grant income. For enterprises this is more complex and involves consistent costing procedures.

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Costing / pricing procedures and purpose

• Consistent costing/ pricing methodology, i.e. having set prices for products such £1 for a pint of milk is important for public perception and financial management.
• Consistent costing/ pricing ensures a consistent gross profit. Gross profit is the profit a company makes after deducting the costs associated with making and selling its products (direct costs or variable costs), or the costs associated with providing its services.
• This is essential for financial forecasting/ budgeting.
• This is essential for comparing the predicted business performance to the actual business performance, and allows businesses to monitor waste, theft or over-portioning.