Chapter 3: Developing Budget, Financial Statements and Plans

What is Budget?
A budget is an estimation of revenue and expenses over a specified future period of time.

 In other words, it’s an estimate of how much money you’ll make and spend over a certain
period of time, such as a month or year.

Budgeting can involve making a comprehensive list of expenditures or focusing on a few categories.
Some people prefer to write their budget out by hand, while others use a spreadsheet or budgeting
app. There’s no correct way to budget — what works for one person might not work for another.

Developing Your Budget

Simple Steps on How to Make a Budget

1. Gather Your Financial Paperwork

Before you begin, gather up all your financial statements, including:

 Bank statements
 Investment accounts
 Recent utility bills
 Credit card bills
 Receipts from the last three months
 Mortgage or auto loan statements

You want to have access to any information about your income and expenses. One of the keys to the
budget-making process is to create a monthly average. The more information you can dig up, the
better.

2. Calculate Your Income

How much income can you expect each month? If your income is in the form of a regular paycheck
where taxes are automatically deducted, then using the net income (or take-home pay) amount is fine.
If you are self-employed or have outside sources of income, such as child support or Social Security,
include these as well. Record this total income as a monthly amount.

3. Create a List of Monthly Expenses

Write down a list of all the expenses you expect to have during a month. This list could include:

 Mortgage payments or rent

 Car payments
 Insurance
 Groceries
 Utilities
 Entertainment
 Personal care
 Eating out
 Childcare
 Transportation costs
 Travel
 Student loans
 Savings
Use your bank statements, receipts, and credit card statements from the last three months to identify
all your spending.

4. Determine Fixed and Variable Expenses

 Fixed expenses cost the same amount each month. These bills cannot easily be changed and
are usually paid on a regular basis, such as weekly, monthly, quarterly or from year to year.

Example:
o mortgage or rent payments
o car payments
o real estate taxes
o insurance premiums. 

 Variable expenses, also called variable costs, are expenses that can change over time. These
costs vary depending on your usage of products or services, and they can change depending on
any number of factors.

Example:
o Gas
o Parking Fee
o Clothing
o Dining out
o Healthcare expenses
o maintenance and repairs.

Importance of Budgeting

Why Is Budgeting Important?

budgeting is important because it helps you control your spending, track your expenses, and save more
money. Additionally, budgeting can help you make better financial decisions, prepare for emergencies,
get out of debt, and stay focused on your long-term financial goals.

 Helps You Control Your Spending

 Keeps You on Track for Your Financial Goals
 Can Help Your Marriage
 Helps You Find Financial Contentment
 Keeps You from Feeling Financially Overwhelmed
 Helps You Avoid or Get Out Of Debt
 Keeps You Organized
 Helps You Prepare for Emergencies
 Helps You Save Money
 Helps You Get (And Stay) Ahead

Keeping All Your Financial Records

Why should I keep records?

Everyone in business must keep records. Keeping good records is very important to your business. Good
records will help you do the following:

 Monitor the progress of your business

You need good records to monitor the progress of your business. Records can show whether your
business is improving, which items are selling, or what changes you need to make. Good records can
increase the likelihood of business success.

 Prepare your financial statements

You need good records to prepare accurate financial statements. These include income (profit and loss)
statements and balance sheets. These statements can help you in dealing with your bank or creditors
and help you manage your business.

 An income statement shows the income and expenses of the business for a given period of
time.
 A balance sheet shows the assets, liabilities, and your equity in the business on a given date.

 Identify sources of your income

You will receive money or property from many sources. Your records can identify the sources of your
income. You need this information to separate business from nonbusiness receipts and taxable from
nontaxable income.

 Keep track of your deductible expenses

Unless you record them when they occur, you may forget expenses when you prepare your tax return.

 Keep track of your basis in property

Your basis is the amount of your investment in property for tax purposes. You will use the basis to
figure the gain or loss on the sale, exchange, or other disposition of property, as well as deductions for
depreciation, amortization, depletion, and casualty losses.

 Prepare your tax return

You need good records to prepare your tax returns. These records must support the income, expenses,
and credits you report. Generally, these are the same records you use to monitor your business and
prepare your financial statement.

 Support items reported on your tax returns

You must keep your business records available at all times for inspection by the IRS. If the IRS examines
any of your tax returns, you may be asked to explain the items reported. A complete set of records will
speed up the examination.

Personal Balance Sheet

What is Personal Financial Statement?

A personal financial statement refers to a document or spreadsheet that outlines an individual's

financial position at a given point in time. The statement typically includes general information about
the individual, such as name and address, along with a breakdown of total assets and liabilities.

 A personal financial statement lists all assets and liabilities of an individual or couple.
 An individual's net worth is determined by subtracting their liabilities from their assets—a
positive net worth shows more assets than liabilities.
 Net worth can fluctuate over time as the values of asset and liabilities change.
 Personal financial statements are helpful for tracking wealth and goals, as well as applying for
credit.
  Although they may be included in a personal financial statement, income and expenses are
generally placed on a separate sheet called the income statement.

Example of Personal Financial Sheet (simple format)

             
  PERSONAL FINANCIAL STATEMENT (MONTHLY)      
             
  Kim Whamos Cruz   May   2021  
  NAME   MONTH   YEAR  
             
  ASSETS   Amount in Peso (P)      
  Cash - Checking Accounts   50,000.00      
  Cash - Savings Accounts   150,000.00      
  Time Deposit   80,000.00      
  Securities - Stocks / Bonds / Mutual Funds   64,000.00      
  Notes & Contract Receivable   90,000.00      
  Life Insurance / Cash surrender value)   500,000.00      
  Personal property (Autos, Jewelry, etc.)   70,000.00      
  Retirement Funds (e.g. IRAs,40B, etc.)   34,000.00      
  Real Estate (Market Value)   1,700,000.00      
             
  Total Assets   2,738,000.00      
             
  LIABILITIES          
  Current Debt (e.g. Credit Cards, etc.)   85,000.00      
  Notes Payable   350,000.00      
  Tax Payable   46,000.00      
  Real Estate Mortgages   710,000.00      

  Total Liabilities   1,191,000.00      

             
  Net Worth   1,547,000.00      
             
Identifying Your Financial Position and Evaluation Progress
Financial Position

Financial Position is the account status of a firm's or individual's assets, liabilities, and equity positions
as reflected on its financial statement.

 total assets, liabilities, and/or equity a person or company holds. This term especially applies
to investment positions.

Two types of Financial Position:

 Long position
Owning or holding options (i.e., the number of contracts bought exceeds the number of 
contracts sold). 

The term long position describes what an investor has purchased when they buy a
security or derivative with the expectation that it will rise in value.

 Equity - the value of the shares issued by a company.

Example:
o For equities, a long position occurs when an individual owns securities. An 
owner of 1,000 shares of stock is said to be "Long the stock."

o In options, being long can refer either to outright ownership of an asset or

being the holder of an option on the asset.

 Short Position
A short, or a short position, is created when a trader sells a security first with the
intention of repurchasing it or covering it later at a lower price.

The sale of a security or derivative, or the state of having sold one or the other. It is im
portant to note that a short position is not closed, and is applied only to sales were 
further action may be required.

Example:
o One who has borrowed securities and has then sold them is said to be have a sh
ort position with respect to that security, because he/she must eventually retu
rn an equivalent amount of the borrowed securities. 

o Shorting is a strategy used when an investor anticipates the price of a security

will fall in the short term.

Evaluating Your Finances

It’s a good idea to evaluate your finances periodically, especially if you’re planning a major purchase
like a new car or home or if there are any significant changes in your income or expenses. Fortunately,
most of the information you need is at your fingertips.

How To Assess Your Finances?

 Add up your income.

To create a monthly budget, you should first determine how much income you have by listing
your monthly income including salaries, interest, pension and any other sources, such as a
spouse’s income.

 Estimate your expenses.

The best way to do this is to keep track of how much you spend in a month.

 Figure out the difference. 

Once you’ve totaled up your yearly income and expenses, subtract the expense total from the
income total to get the difference. It’s a simple step that can reveal a lot about your spending
habits. 

 Track it.
Creating a budget is just the first step. Keep track of your monthly income and expenses to
make sure you’re sticking to your budget. It may take time to find the balance that works for
you.

Time Value of Money

The time value of money (TVM) is the concept that a sum of money is worth more now than the same
sum will be at a future date due to its earnings potential in the interim.

 Time value of money means that a sum of money is worth more now than the same sum of
money in the future.
 This is because money can grow only through investing. An investment delayed is an
opportunity lost.

Understanding the time value of money

Money has a time value in addition to its exchange value due to its earning power. This fact needs
to be accounted for when comparing payments made or received at different points in time.

Example:

o P100 today would be worth P110 in one year, if you can earn 10% interest. Therefore, a
payment of P110 in one year is equivalent to P100 made today. The time value of that P100
is the P10 of interest it could earn over that time period. Bringing a future payment into
present dollars is often called discounting.

o The money deposited into a savings account earns interest. Over time, the interest is
added to the principal, earning more interest. That's the power of compounding interest. 
Sources/References:

https://www.toweinsurance.com

https://bethebudget.com

https://www.irs.gov

https://financial-dictionary.thefreedictionary.com

https://www.investopedia.com/

https://www.practicalmoneyskills.com

https://learn.robinhood.com/

Prepared by:

Lesley Allen D. Kabigting, MBA

College of Business Administration
Guagua National Colleges