Analysing a Financial Position Using Budget Information

Understanding Financial Position

A financial position relates to the state of an individual or organisation’s finances, and typically includes assets, liabilities and equity.
An individual or organisation’s financial position can be analysed using information such as income, expenses, debt and savings.
It’s important to understand a financial position and how it changes over time, as this allows for informed decisions regarding budgeting, borrowing and saving.

A budget is a plan for how to spend and save money over a specific period, often a month or a year.
Budget information includes details of planned income and expenses.
Fixed expenses are the same every month while variable expenses can change based on consumption, choices, or circumstances.
Understanding a budget and sticking to it can help to ensure that you don’t spend more than you earn, avoid debt, and save money.

In order to analyse a budget, you may use a budget summary. This should detail all sources of income, all expenses (both fixed and variable), and the surplus or deficit at the end of the budgeted period.
The difference between the total income and total expenditure is referred to as a surplus if it’s positive (income is greater than expenditure), or a deficit if it’s negative (expenditure is greater than income).
If there’s a regular deficit, this suggests that the individual or organisation is living or operating beyond its means, which could lead to debt.
On the other hand, a regular surplus can be saved or invested, improving the individual or organisation’s financial position over time.
Be aware of managing unexpected expenses. Having an emergency fund, also considered as a part of the budget, can help tackle such situations.

To improve a financial position, one must either reduce their expenses, increase their income, or both.
You can possible reduce expenses by cutting back on non-essential spending, negotiating improved deals with service providers or paying off debts.
You could increase your income by asking for a raise at work, finding a new job that pays more, taking on additional work or investing in assets that generate income.
Regularly reviewing and adjusting the budget can help to ensure that it remains appropriate and effective.