Last week, we looked at Companies aligning their financial plans with government fiscal policies when budgeting. Today, we will look at companies aligning their financial plans with monetary policies when budgeting.
Budgeting
Budgeting is the process of planning how you want to spend your money, and it can also be defined as an organization's financial plan that represents its goals and how it wants to achieve them. The budget should incorporate the current circumstances as well as changes in plans, such as new products, services, or a policy change. A well-functioning budget aids an organization in achieving its objectives by allowing it to plan for spending and change.
What are Monetary Policies?
Monetary policies controls how money is being supplied, how the costs are regulated and the value of money in the country preventing an inflation or a deflation which in turn affects companies’ expansions, employment, and net exports.
The government uses three main tools to regulate the cost, supply of money and its value - Open Market Operations (OMO), Reserve Requirements and Discount Rate or Discount Window Operations
Buying or selling government assets through open market operations, modifying the discount rate granted to member banks, or changing the reserve requirement (the amount of deposit money banks must have on hand that isn't already spoken for through loans) are all instances of monetary policy actions.
Aligning the Budget with Monetary Policies
Companies must align their financial goals with the policies that affect their budget after analysing the impact of government monetary policies. Some factors to consider:
Interest Rates: companies should analyse whether the existing government monetary policies will have an impact on existing interest rate in its financial plans.
Discounted Cash Flow (DCF): Companies should also consider how the discount rate used in monetary policy instruments affects the DCF of a company's proposed investments, as well as how the company's current cash flow or predicted future cash flow supports it.
Taxes: Companies should examine how monetary policies effect their tax payments, because if taxes rise, company activity slows which hampers performance.
Risks: companies should analyse whether the monetary policies are expansionary or contractionary and how it affects their financials.
In summary, when a company is preparing a budget, the company should analyse how the government monetary and fiscal policies impact its financial plans.
Our financial advisory specialist team can work with you and your business to prepare your 2022 budget to give your business a strong head-start into the year. Please email us at www.ovacgroup.com for a free consultation.
At OVAC Group, we are your pragmatic partner