In Engineering Project must define budget as well and project expectations and monitor them.

Personal Financal model is example to make it real (and other

other benefits)

From Status to Goals To Plans

Where are you now? (financial statements) Where do you want to go? (financial goals) Tools to help you get there

– Budget– Spreadsheets– Wise use of credit

Monitoring progress (financial statements)

Personal Financial Statements

Balance Sheet: shows position at point in time– Assets listed at market values– Liabilities– Assets – Liabilities = Net Worth

Income & Expense Statement: shows where money came from & where it went– Gross income– Expenses– Income – Expenses = Surplus (or deficit)

Example Balance SheetDecember 31, 2005

Liquid Assets Current Liabilities

Checking 500$ Credit Card 2,000$

Money Market 3,500 Total CL 2,000$

Total LA 4,000$

Investments Long-term liabilities

IRA/401K 3,000 Car loan 5,000

Total inv. 3,000 Student loan 8,000

Personal property Total LT L 13,000

Car 12,000 TL 15,000

Furniture 1,000

Total pers pr. 13,000 Net Worth (Assets - Liabilities)

TA 20,000$ Net Worth 5,000$

Income Statement Surplus or Deficit:

Effect on Balance Sheet (P&L) If income > expenses => Surplus (Profit)

If income < expenses => Deficit (Loss)

In many Balance Sheets and other accounting, negatives are shown in RED to highlight them. (Option for excel!)

Deficit Spending (being “in the Red) DECREASES

Net Worth!

Being in the red can kill aproject unless initial investment is large

enough

Budgeting

Why budget?

What is a budget?– Short-term forecast of income & expenditures (I.e.

revenues and costs a project)– Tool to monitor & control spending

Budgeting

Creating a budget (short term model)– Determine how you spend money now.

– Evaluate your spending in light of your goals.

– Create a forecast (budget) of your monthly income and expenditures.

– Track your spending and adjust as necessary.

Financial Model (longer term model)– Future income/costs very approximate, be careful

Use Excel or financial planning software.

Financial models of the futureExpense models

Build your Expense Statement Measured 2006, and estimated 2011, 2021, 2041.Break expenses into

required costs, expected costs, discretionary costs.

5 different “income” models can either yield different balances or allow more of expected/discretionary costs.

Why Financial Goals? Use resources in a way that results in the greatest

utility (satisfaction) to effort.– How much do you enjoy that daily Starbucks?

$4 per day x 260 days per year = $1,040 annually for 30 years

Invest it: what would it be worth in 30 years?

Direct “Investment” returns “return”-inflation.

What if used to avoid debt (e.g. CC debt) and keep budget netural?

Assumptions & CalculationsPV

(Present Value)

$ 0

PMT

(Payment)

$1,040

N

(# of Payments)

30

I/Y (Interest/Year = Investment – Inflation)

9 – 3 = 6

FV?

Can use formula or just “simulate” in excel.

Value = lastval *(1+ yield)+ new_Savings

Use relative formula for “state” and absolute formula for “rates”.

Can more easily adjust for changes over time and 1-time adjustments. Can understand the impact process.

Given values in states at time, can build a graph using plot functions.

Do this yourself now…0

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1stQtr

2ndQtr

3rdQtr

4thQtr

EastWestNorth

Financial Goals

Short-term (< 1 year) (Budget adjustments)

Intermediate term (1 to 5 years)

Long-term (> 5 years)

Defining Goals

Dollar amount

Time frame

Prioritize (Why?)

Wise Use of Credit Some debt is appropriate: an asset purchased on

credit should outlive loan.• Education

• House

• Car

Pay off credit card debt.– Pay highest interest rate card first.

– Roll high interest rate debt onto low interest rate card

– Pay more than minimum payment.

Control spending

Credit Reports & Credit Scores

Borrowing costs $$ and the cost depends on risk. (For companies and for people…)

Free copy of personal credit report annually from each of 3 major reporting agencies

Check your credit reports & FICO score before applying for a loan

FICO scores range from 500 (bad) to 850 (good) Factors that hurt your FICO score

– Delinquency on accounts– Amount owed on accounts– High balances relative to credit limits– Recent credit applications (so trying and failing is bad)

Financial models of the futureExpense models

Already have your Expense Statement Measured 2006, and estimated 2011, 2021, 2041.Break expenses into

required costs, expected costs, discretionary costs.

Now add5 different “income” models can either yield different balances or allow more of expected/discretionary costs.

Budget For your project ideas

Roughly estimate costs of design, development and production. Include discussion of your estimates.

Roughly estimate the “sales/value” and market size.

List Your data sources/assumptions.