Budgeting and Forecasting

Cash flow is the movement of cash into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used

• to determine a project's rate of return or value. The time of cash flows into and out of projects are used as inputs in financial models such as internal rate of return, and net present value.
• to determine problems with a business's liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash, even while profitable.
• as an alternate measure of a business's profits when it is believed that accrual accounting concepts do not represent economic realities. For example, a company may be notionally profitable but generating little operational cash (as may be the case for a company that barters its products rather than selling for cash). In such a case, the company may be deriving additional operating cash by issuing shares, or raising additional debt finance.
• cash flow can be used to evaluate the 'quality' of Income generated by accrual accounting. When Net Income is composed of large non-cash items it is considered low quality.
• to evaluate the risks within a financial product. Eg matching cash requirements, evaluating default risk, re-investment requirements, etc.

Generally an Executive Information System is a slightly dumbed down version of reports generated by an Accounting System. Generally, no inputs are allowed into the accounting system from the EIS. The theory is that it makes executives lives easier, and is considered a throwback to the days when executives did not know how to operate a computer system.

Read more: Example_system_of_Executive_information_system

Assets could have dropped as a result of losses, or gained as a result of gains. As a complicating factor, assets can still drop if there has been a profit, for example, when the profits have been used to pay down debt.

When the balance sheet is made before profit appropriation, net income will be included as a item on the balance sheet in the equity section. In case net income is a loss, this amount will be negative. This is the situation that the question refers to (a loss is shown on the balance sheet).

When the balance sheet is made after profit appropriation, net income is not shown as a separate item on the balance sheet under equity. Depending whether or not a dividend is paid, net income will show up as a dividend payable, or will be added to a reserve (for example, retained earnings). In case of a loss, it will be subtracted from a reserve.

Free cash flow is the sum of operating cash flow and investing cash flow. This is generally positive for a 'cash cow' (operating cash flows exceeding the investments), and negative for a growth firm (investments exceeding the cash generated by operations).

However, it could be the case that the dividend has been declared, but not yet been paid. In that situation the balance sheet may include a liability 'dividends payable'. However, when you see such a liability, you can't tell whether or not any dividends are already paid before the end of period.

The statement that shows dividends is the statement of retained earnings (sometimes this statement comes with a different name, for example 'movements in equity'). The statement of retained earnings will show the beginning of year retained earnings, plus net income minus dividends, which equals end of year retained earnings.

The budgetary process has four phases namely:

1. Budget preparation: the plan is used to determine expenditure and sectoral ceilings; to formulate the function/project activities; and to determine cost estimates;
2. Budget and review: the plan is used to verify the consistency of the budget with approved activities, goals and objectives;
3. Budget execution: the plan is the basis for determining the activities to be undertaken during the period; and
4. Budget accountability: the plan sets the standards against which performance can be measured

SOURCE: Department of Budget and Management (DBM)

Imagine a department that delivers 2 services - street cleaning and solid waste management.

Line-item budget would look like:

Director - 1000$

Cleaners - 5000$

Trucks - 3000$

Workshop - 6000$

Electricity - 500$

Total: 15500$

Programme budget will have all the costs apportioned:

Street cleaning (for 1 month, 2km of streets cleaned every day)

Director (50%) - 500$

Cleaners (100%) - 5000$

Electricity (20%) - 100$

Total street cleaning: 5600$

Solid waste management (for 1 month, 500kg solid waste processed every day)

Director (50%) - 500$

Trucks (100%) - 3000$

Workshop (100%) - 6000$

Electricity (80%) - 400$

Total solid waste management: 9900$

Line-item eventually is still retained by most public entities, because it is the first step in identifying costs, whether governments make a move to programme budget - depends on their needs.

Programme budget helps achieve performance evaluation, i.e. how much street cleaning costs, how much does it cost to clean 1 km of street, how is the current dpt performing against other similar units, and relate outputs to costs.

Line-item is simpler, helps in reviewing aggregate costs (i.e. how much did the electricity cost in a particular month) and only looks at inputs, does not relate outcomes to inputs and does not have efficiency and effectiveness as priority.