Written by: Hazel Domingo Babiano
All organizations, both public and private, need to operate successfully financially in order to do all the things they want to. Even non-profit making organizations such as charities, local authorities, etc., need to achieve a surplus or profit in order to survive. In the case of schools, mishandling the school budget and finances may cause severe losses which, eventually, may lead to the cessation of school operations. Understanding basic budgeting is therefore important to keep the school going and growing.
The Importance of Financial Controls
It is not enough for an organization to break even. Profits are important because no matter how good an organization is at budgeting and achieving budgets, it is almost impossible for them to guarantee that they will exactly cover their expenditure. If an organization was only aiming to break even and consistently made a loss (i.e. expenditures are higher than income), then eventually it will have to close down
For an organization that wants to expand, to do new things, employ more staff, give pay rises, and buy new machinery and equipment, it needs to have funds to do that. The best way for a school to get these funds is to provide for themselves out of their profit or surplus. Also, if an organization has shareholders, these shareholders will expect to be paid dividends. Dividends cannot be paid unless the school is making a profit.
Most organizations have to pay corporation tax to the government which helps to pay for Education, Health, Defense and so on.
Important Terms to Remembers
- Profit and Loss Accounts
Profit and loss account deals with measuring the viability of a business. In oher words, it is doing well enough to stay in a business or in a case of the public sector, to justify its existence.
- Cash Flow
Even though an organization may be in profit on paper, it is essential that it has enough money in the bank to pay its bills. For example, it may be owned a substantial sum by its customers, but if they haven’t paid and the money isn’t in the bank, the organization may not be able to pay its salaries, bills, and its suppliers.
Because organizations spread the capital costs of fixed assets such as equipment over their expected “life” (so that one year’s profit is not adversely impacted versus another relative to the use of the asset), this is another reason why cash flow and profit are not the same.
When looking at the profit and loss account, we also need to take into account the cash position of the organization. In other words, if the profit is good, but the money isn’t in the bank, the organization knows that it needs to take action.
III. The Balance Sheet
The Balance Sheet is basically a record of the assets that an organization owns and the wealth of the business. It is also records of the source of funding that the organization has, for example, the amount of the money contributed by shareholders (known as Capital), retained profit or reserves (the money that the organization has kept to one side and not paid to shareholders) and any long-term loans that it has.
A budget enables an organization to measure its performance against the financial plan that it has for its future. Normally, the yearly budget will be linked to the longer-term financial plan which will be tied into the aims of the organization.
A budget means that the organization can decide in advance what it wants to spend its money on and how much money it needs to make in order to buy new equipment, etc. and to make a profit.
During the year, the organization will have to report how well it is achieving against its budget. Many organizations will forecast in advance how well they thing they are likely to do compared to what the budget says they must do. This process becomes more important as the organization comes to the end of its financial year when the budget may no longer be an up-to-date guide to predicting financial results.
*This article was prepared especially for Saint Matthew’s Publishing Corporation