10.2: Forecasts, Budgets, and Financial Controls

Forecasts

Forecasts predict revenue, costs and expenses for a specific future period. Short-term forecasts would include predictions for the upcoming year, while long-term forecasts would include predictions for a period longer than one year into the future. In developing forecasts, the financial manager considers many factors, including the current and anticipated changes in government regulations, consumer trends, competitor actions, changes in company goals, etc. and the impact these changes might have on the company’s financial situation.

Budgets

Using forecast expectations, a financial manager creates a budget, a financial plan that outlines the company’s planned cash flows, expected operating expenses, and anticipated revenues. The master budget has two major categories: the financial budget and the operating budget. The financial budget plans the use of assets and liabilities and results in a projected balance sheet. The  operating budget helps plan future revenue and expenses and results in a projected income statement. Another component of the budgeting process is the capital budget, which considers the company’s long-range plans and outlines the expected financial needs for significant capital purchases such as real estate, manufacturing equipment, plant expansions, or technology. Since capital projects are often financed with borrowed money or money raised through the sale of stocks or bonds, it is important to plan ahead to ensure that necessary funds are available when needed. During the capital budget process, each department in the organization puts together a list of its anticipated needs. Then, senior management and the board evaluate these needs to determine what will best maximize the company’s overall growth and profitability.

Financial Controls

A financial controller is responsible for updating financial controls and overseeing all the accounting activities in an organization. Financial controls are procedures and policies that monitor and manage financial resources to prevent errors, fraud, and optimize allocation. These are used in strategic management planning. Preventive controls avoid issues, while directive controls guide actions. Internal controls ensure accurate reporting and compliance. Financial controls are regular checks of financial statements and processes. The financial statements are examined to identify losses and areas of potential losses and to reduce extravagant expenses. Financial Controls also assist in mitigating financial risks and meeting financial objectives.^[1]

The top four internal controls that reduce fraud losses and improve detection are:

• A robust code of conduct.
• A strong internal audit department.
• Management certifications of financial statements.
• Management reviews of internal controls, processes, accounts or transactions.

Four fundamental, inter-linked building blocks must be in place to ensure good practice in financial management. ^[2]

• Accounting records: Every organization must keep a record of all financial transactions that take place so they can show how funds have been used.
• Financial planning: Preparing budgets and cash flow forecasts for projects and programs and for longer-term financing strategies, to ensure successful projects and organizations.
• Financial monitoring: Using financial reports to help managers monitor the progress of their projects and take actions to keep things on track; they are also needed for accountability to funders and external stakeholders.
• Internal control: A system of checks and balances designed to manage risk, safeguard financial resources from loss due to errors, theft or fraud and protect staff.

Media Attributions

“Woman Reading a Report” by Cedric Fauntleroy, used under the Pexels license.