Oil and Gas

Leadership Development Program

Financial Planning & Budgeting
Session Objectives
• Key Financial Vocabulary
• Understanding Financial Statements
• Reading and Understanding Budgets
• Basics of Budgeting for non Financial
Managers
 Module Seven: Financial
Glossary
• What is finance

• Commonly used terms

• Key players

• Important finance organizations

• Generally Accepted Accounting Principles (GAAP)

 Accounting vs. Finance
• Accounting: Recording and reporting of financial
transactions, including the origination of the
transaction, its recognition, processing, and
summarization in the FINANCIAL STATEMENTS.

• Finance: The art and science of managing money.

Finance is concerned with the process, institutions,
markets, and instruments.
 Commonly Used Terms
• Accounting • Depreciation
• Assets • Equity
• Balance sheet • Expenses
• Budget • Financial ratio
• Capital • Income
• Cash flow • Income statement
• Credit • Liability
• Debit • Net income
 Key Players

• CEO • Board of Directors

• CFO • Government
• Senior Leadership Regulators
• Accounting • Stockholders
• Department • Investors
Managers • Creditors
 Understanding GAAP
The Generally Accepted Accounting Principles were developed to
give a consistent framework for companies to use in structuring
their financial statements.

In general, GAAP deals with the following reporting standards:

• When is revenue recognized as actual revenue that can be counted? This
prevents overstatement of revenues by determining when revenue can be
claimed or recognized.
• Balance sheet item classification standardizes the items found on the
balance sheet to avoid confusion.
• Outstanding share measurements
 Module Eight: Understanding
Financial Statements
Financial statements are the communication tools for the
organization. Understanding these financial statements opens
the door to analyzing finance data for budgeting, controlling, and
making decisions.

This module will discuss the following topics:

• Balance sheets
• Income statements
• Statement of retained earnings
• Statement of cash flows
• Annual reports
 Balance Sheets
The balance sheet is a report on the financial condition of an organization and
is required by GAAP. In the balance sheet, assets are expressed in terms of
liabilities and capital, which must equal each other.

The balance sheet can reveal a lot about a company. The level of debt the
companies owes against what it owns in cash and properties could reveal a
liquidity problem.

Furthermore, if a company has no debts and huge level of assets, this may be
a sign that the company is not running efficiently and is allowing the assets to
remain idle instead of using it for a return.
Balance Sheets
 Balance Sheet (LE) 2005 2006
ASSETS
Current Assets
Cash & equivalents 15,000 46,000
Accounts Receivables 55,000 47,000
Inventory 110,000 144,000
Prepaid Expenses 5,000 1,000
Total Current Assets 185,000 238,000

Investment For Sales 127,000 115,000

Gross Fixed Assets 505,000 715,000

Less: Accumulated depreciation (68,000) (103,000)
Net fixed assets 437,000 612,000

TOTAL ASSETS 749,000 965,000

LIABILTIES
Current Liabilities
Accounts Payable 43,000 50,000
Accrued Expenses 9,000 12,000
Income Tax Payable 5,000 3,000
Total Current Liabilities 57,000 65,000

Long-Term Liabilities
Bond Payable 245,000 295,000

TOTAL LIABILTIES 302,000 360,000

STOCKHOLDERS EQUITY
Paid-in capital (Common Stock) 200,000 276,000
Additional Paid in Capital 115,000 189,000
Retained Earnings 132,000 140,000
Total Stockholders' Equity 447,000 605,000
Total Liab. & Stockholders' Equity 749,000 965,000
 Income Statements
(Profit & Loss Statements)
Income statements list all the areas where income is generated.
Sometimes, the income is categorized certain categories:
• Income from sales
• Income from interest
• Income from investments
The income statement also contains the expenses and this can
be categorized too:
• Dividend expense
• Operating expense
• Cost of goods sold
• Taxes
 Income Statement (LE) 2006
Revenue 698,000
COGS (520,000)
Gross Profit 178,000
Operating Expenses (110,000)
Deprec iation (37,000)
Operating Income 31,000

Interest expense (23,000)

Interest inc ome 6,000
Gain on Sale of Investments 12,000
Loss on Sale of Plant Assets (3,000)
Income Before Taxes 23,000
Inc ome T axes (7,000)
Net Income 16,000
 Statement of
Retained Earnings
This report is required by GAAP and it reports the
change in owner’s equity from one period to another.
The basic components of the statement of retained
earnings include the following:
• Beginning balance
• Net Income/loss
• Dividends paid
• Ending balance
 Statement of
Retained Earnings
Ending Equity =
Beginning Equity + Investments - Dividends Paid + Income

Common Stock (recorded at par value)

+ Premium on Common Stock (issue price minus par value)
+ Preferred Stock (recorded at par value)
+ Premium on Preferred Stock (issue price minus par value)
+ Retained Earnings
----------------------------------------------------------------
= Stockholders' Equity
 Statement of Cash Flows
The statement of cash flows helps to determine
how cash flowed in and out of the company.
This is considered a mandatory financial report.
There are three main components of the
statement of cash flows:
• Cash flow from operations
• Cash flow from investing
• Cash flow from financing
Cash Flow Statement
Sub Total 2006
(Indirect Method)
Cash Flow from (for) Operating Activities
Net Income 16,000
Deprec iat ion 37,000
Gain on Sale of Invest ment s (12,000)
Loss on Sale of Plant Asset s 3,000
Dec rease in A/R 8,000
Inc rease in Invent ory (34,000)
Dec rease in Prepaid Expense 4,000
Inc rease in A/P 7,000
Inc rease in A/E 3,000
Dec rease in Inc ome T ax Payable (2,000)
14,000

Net Cash Flow from Operating Activities 30,000

Cash Flow from (for) Investing Activities

Purc hase of Invest ment s (78,000)
Sale of Invest ment s 102000
Purc hase of Plant Asset s (120,000)
Sale of Plant Asset s 5000
Net Cash Flow from (for) Investing Activities (91,000)

Cash From (for) Financing Activities

Repayment of Bonds (50,000)
Issuanc e of St oc k 150,000
Dividend Paid (8,000)
Net Cash Flow From (for) Financing Activities 92,000

Net Change in Cash during t he period 31,000

Cash Beginning Balanc e 15,000

Cash Ending Balance 46,000

 Module Nine: A budget is just
a method of

Understanding Budget worrying before

you spend
money, as well
Understanding budgets will help you create and as afterward.
manage one for your areas or departments.
Furthermore, knowing how a budget is formed Anonymous
will give you working knowledge that will increase
your value to the organization.
In this module, you will learn the following on
budgets:
• Common types of budgets
• What information do I need?
• Who should be involved?
• What should a budget look like?
 Common Types of Budgets
There are six commonly used budget types for businesses. Here they are:
• Sales budget: This budget estimates future sales. This is usually broken down into
units and dollars. This budget is used to create company sales goals.
• Production budget: This budget estimates the number of units that must be
manufactured to meet sales goals.
• Cash Flow/Cash budget: This budget predicts future cash receipts and
expenditures for a particular time. It is usually for the short-term future.
• Marketing budget: This budget is an estimate of the funds needed for promotion,
advertising, and public relations in order for the organization to market their
product or service.
• Project budget: This budget is a prediction of the costs associated with a particular
project.
• Expenditure budget: This budget estimates what expenses the organization will
have for a time. This could include supplies for sale, office supplies, and bills.
 What Information do I Need?
In order to begin a budget, you will need the following three
pieces of information:
• Goal: Identifying a goal is the first step to creating a budget.
• Money: How much money do you have? In the corporate
environment, you may need to review the financial reports to
determine how well the company is doing.
• Costs: You will need to determine how much are the costs
related to your goals.
 Who Should Be Involved?
When creating a budget for the organization, a
team of people from various areas should be
assembled. The team should include following
areas:
• Accounting
• Operations
• Sales
• Top administration officials
 What Should a
Budget Look Like?
Here is a basic outline of the categories of a budget:

• Categories: This column is on the left usually and it lists all the inflows,
expenses, and net income categories. This can be general or very specific.
• Actual: This column is usually to the right of the categories column and
contains the actual numbers that have been reported.
• Budget: This column is usually to the right of the Actual column. This
column contains the budgeted numbers.
• Difference: This column is the last column on the right of the page. This
column shows the difference from the budget.
Module Ten: Budgeting About the time
we can make

Made Easy ends meet,

somebody
moves the ends.
In this module, you will learn the
following techniques that will make Herbert Hoover

budgeting easier:
• Factoring in historical data
• Gathering related information
• Adjusting for special circumstances
• Putting it all together
• Computer based methods
 Factoring in Historical Data
• When budgeting, using historical data could make the process
easier. Using previous financial information could reveal
trends that could help you determine certain budget
numbers.
• Historical data could come from other businesses.
• When using historical data, make sure it is reliable and from a
good source.
• Historical data could be incorporated right into your budget
report.
Gathering Related Information
The more information you gather from other areas the
easier you can determine your budgeting needs.
Looking at these areas, you should realize that creating
a budget involves time, but it does not have to be
difficult.
• Analyze the external environment
• Analyze the internal environment
• Analyze the staff requirements
• Review existing policies
 Adjusting for Special
Circumstances
The LOAD techniques helps organize potential situations and
categorize them so you can make the decision if these costs
should be factored into a reserve category on your budget.

• List all potential issues that could affect the budget

throughout the budget period.
• Order the issues from the least likely to occur to the most
likely.
• Assess the cost of each issue if this circumstance were to
manifest as reality
• Determine if this cost should be factored into a contingent
reserve category on your budget.
 Putting It All Together
There are many approaches to putting a budget together. Here are five steps
you can take to putting the budget together. We even gave it an acronym so
you can remember it later. It is called RADAR.
Research both the internal and external environments to determine the
factors that may affect your budget throughout the budget period.
Acquire the goals of the organization and every department, determine, and
work with the leaders to determine what it will take financially to realize
these goals.
Develop a working budget. This is used by the budget team and is used for
the review process, making revisions as necessary.
Adopt a final budget for final review, gain the approval by the Board of
Directors, and implement.
Report results and revise the budget as necessary, showing all variances in
the appropriate column.
 Computer Based Methods
It is no doubt that computers make things easier. When it comes
to creating a budget, computer programs can make this an
efficient process. Computer programs offer these benefits when
creating a budget:
• Allow collaboration across the organization
• Centralize the budget document and avoid duplication
• Reduced calculation errors
• Quick analysis
• Reporting features
• Graphs and visuals
Thanks You