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How to do Financial PlanningWhat is Financial Planning ?

Financial planning a process where you plan your Investments in such a way which meets your

financial goals over time.

You must be very disciplined when you do this , you must know from where you the money is

going to come to you and how are you going to save or invest it , and in future how are you goingto achieve your goals.

What are the Steps in Financial Planning

1. List down your Goals

Prepare a list of financial goals. It can be any requirement like Buying Home , Car , Child

Education , Child Marriage , Vacation , Retirement etc . Along with this there must be a very clear

timeline associated with the Goal. Something like "I want to buy a Car after 3 years , which will

cost 50,000 at that time" .

2. List down Your Cash Flows and Cash Inflow

Prepare the list of your cash flows , cash flow means , how money is coming and going ? Any

money coming in is Cash inflow and Any Expenses is Cash outflow.

It will help you in understanding how money is coming to you and how is is utilized and how

much is remaining for investing purpose. By Doing this , you can get very clear of how you are

going to get money and how you are going to spend it, and how much you are left with to spend.

. Understand and figure out your Risk-appetite

This is a very important part of financial Planning, Risk appetite is the amount of risk a person

can take while investing. How much money you can afford to loose in order to earn high returns

defines your risk taking ability.

For Example:

if you are ready to loose 60% of your money , your risk appetite is high

If you are ready to loose 25% of your money , your risk appetite is moderate

If not at all ready to loose your money even 1% , you are not at all a risk taker.

It depends on you which category you belong in. it depends on individuals Physcology , Family

Conditions , Attitude etc

Generally people in there early age have more risk appetite as they have less responsibilities

and more freedom to invest . Later when they get married and have responsibilities , they cant

risk money to loose.

4. List down your Financial Goals

At this point , you must be clear with your goals. Financial goals are the list of things for which

you need money and you must have a predefined target time.

Example:

Manish earns 3,00,000 per year with 1,00,000 left for investment, he has moderate risk appetite.

Goals:

1. Buy a Car within 2 years worth 5,00,000.

2. Vacations in New Zealand worth 8,00,000 within 4 yrs.

3. Buy home worth 40,00,000 in 10 years.



Here, Goals are not compatible with amount invested per year and with that kind of risk-appetite.

Therefore , Goals must be realistic and achievable , it must not look totally irrelevant.

5. Make sure your Goals are realistic

At this point you must make sure that your goals do not look unrealistic and unachievable . If they

do , then you must either lower your goals or increase risk appetite or increase the investible

amount per year. This gist of the matter is , Be Realistic !!!

6. Make the Plan

Once you are done with all these steps , Its the time for the planning.

For each goal you must devise a systematic investment plan , by choosing the correct

investment instrument. For example: For your child Education make sure you invest in something

which is not very risky for the time period you are going to invest in that. You can invest in

equities for that , as Equities are not risky in very long term and generate great return.

But for a short term goal like vacation in 1-2 yrs , don't invest in equities , rather go for a debt

fund or a fixed deposit. In this way , you have to be clear how you are going to invest for

achieving your goals.

7. Review and Take advice Revise your steps and make sure everything is correct. If you are unclear about anything meet

some one who is more knowledgeable than you , See a financial planner or a knowledgeable

friend.

8. Take Action and keep Reviewing

The last step is to take Action and start executing the plan with discipline and make sure you

change you goals , r isk appetite as time passes and these things change over time.

I would be happy to read your comments or disagreement on any topic. Please leave a

comment.

Detail

8 easy steps to financial planning

We all know that making a financial plan plays an important role in wealth generation. However, for some

reason or the other we find excuses for not making one. If you have not yet made a financial plan that charts your

future earnings, expenses and returns from your investments then perhaps it's about time you made one.

Here are eight easy steps that will help you make your financial plan.

1. Identify and list down your future needs/ objectives

Each individual aspires to lead a better and a happier life. To lead such a life there are some needs and somewishes that need to be fulfilled. Money is a medium through which such needs and wishes are fulfilled. Some of

the common needs that most individuals would have are: creating enough financial resources to lead a

comfortable retired life, providing for a child's education and marriage, buying a dream home, providing for

medical emergencies, etc.



The first step in a making a financial plan is to identify the goals which have to be met. These goals are the needs

and the objectives of the individual. Clarity in this respect would be the starting point to help an individual work

out the journey on the financial road which needs to be followed.

Disclaimer: The explanation in this article is directed to help a person understand in a broad sense the financial

planning process. Specific skills and knowledge other than discussed above maybe needed in creating a financialplan. The approach may vary based on the unique circumstances specific to different individuals.

2. Converting needs into financial goals

Once the needs/ objectives have been identified, they need to be converted into financial goals.

But how do we convert the needs into financial goals?

Two components go into converting the needs into financial goals. First is to evaluate and find out when you

need to make withdrawals from your investments for each of the needs/ objectives. Then you should estimate the

amount of money needed in current value to meet the objective/ need today. Then by using a suitable inflation

factor you can project what would be the amount of money needed to meet the objective/ need in future.

For example, let us consider the need to create an education fund for your child which is needed 15 years from

now. Let us assume that the current cost of education today would work out to around Rs 4 lakh. We can project

what is the amount needed after 15 years for your child by applying a suitable inflation factor to the current cost

of education assumed as Rs 4 lakh.

Assuming that cost of education would rise at 7 per cent per annum over the next 15 years, the total amount

required after 15 years would work out to Rs 11.03 lakh.

Similarly you need to estimate the amount of money needed to meet all such objectives/ needs. Once you have

all the values you need to plot it against a timeline.

This is very easily done by using spreadsheets. It will give you a broad idea about when and how much money

you would need during your life in future.

3. Getting a grip of your current financial state

To get clarity on your current financial state, it is necessary to create a family budget. As part of this budget, you

need to list down your income and expenses.

y Income should include the husband and wife's income as well as rental income if any y The expenses part should be split under monthly expenses and annual expenses

y Under monthly expenses you should list down the regular monthly expenses like groceries, phone bills,electricity, petrol, etc

y Under the annual expenses you need to include non-regular expenses like school fees, car insurance,

vacation, etc

This enables you to get an idea of the pattern of cash outflows (expenses) during the year. Accordingly you can

plan to keep adequate money liquid for the necessary expenses during the course of the year. All Loan EMIs

(equated monthly installments) paid should be kept separate under the monthly expenses head, as after a finite

number of years they will no longer be part of your regular living expenses.



The most important information that you get from the above study is your current annual cost of living (that part of

expenses which supports your current lifestyle).

An analysis of the above figures would enable you to understand the amount of savings (income less expenses)

that you are left with on an average. This in turn will give you an idea of surplus regular money available for

investment. This is the savings that will take care of you and your family when income from your work stops.

Hence it is extremely important to understand what is happening to your savings. A strategy to invest

the savings in the most appropriate way is critical for you to meet your financial goals.

4. Stage I of the financial plan: Risk planning

The first component of the financial plan would cover the aspect of risk planning. The two major risks are that of

illness and death. The role of insurance is to cover risk (in financial terms only). A suitable health insurance cover is worked out after taking into account the situation of the family and information about the availability of anycover from the employer.

The next step is to estimate the amount of life insurance cover required. Loss of income in case of death of an

earning member may put the rest of the family into financial discomfort (especially where he/ she may be the

primary bread winner).

The role of insurance is to take care of this financial discomfort. The most suitable life Insurance cover for this is

a term cover. Information on financial goals and your current financial state, when suitably modified, becomes a

base from which to work towards estimating the amount of life insurance and the tenure of the cover.

Once the risk planning is in place the cash flows for long term financial planning is worked out.

5. Stage II of financial plan: Core cash flow study

You now have the basic inputs needed to work on your financial plan. The needs/ objectives have been

converted into financial goals. You know the amount of money and the time when it is required for each of your financial goals. These financial goals will be met through creating financial resources by investing your savings.

You have a basic understanding of your current cash flow (income and expenses statement) through creating a

family budget. From this you can get an idea of your potential savings. By projecting your income and expenses

into the future you can get an idea of the kind of savings you can have each year.

By assuming that savings grow at different rates you would get an idea of how your investment pool would grow

into the future. You will have to work out at what rate of growth of your savings would all your financial goals be

met. If the rate needed is very high then it gives you an idea that you may have to save and invest more or

alternatively sacrifice some financial goals.

In case the return needed is very low, you can explore the possibility of achieving financial freedom

earlier in life. You can mix and match and work out different scenarios and then finalise a plan that suits you

most. As this is a part that involves a lot of number crunching, spread sheets make it easier to work

6.Determining a suitable asset allocation strategyBased on a projection of the estimates of long term cash flows done you know the rate at which you

need to grow your investments. The financial plan thus lays the broad investment parameters in terms of an

asset allocation strategy.

Different assets classes like debt, equity, real estate, etc. grow at certain natural growth rates over the long term.

You have to work out an investment strategy to invest the saving across various asset classes in a suitable ratio

so that you meet the targeted return as per the financial plan.



If a higher return is needed then accordingly a higher exposure to higher growth assets like equities isneeded. Discipline in maintaining the asset allocation is the key to achieving success in the long term

7. Product selection and plan execution

Only after the asset allocation strategy as per the financial plan is in place does the question of product

selection and execution arise.

This strategy guides us on the allocation of money to various asset classes (example: debt, equity, gold, etc). For

each of the asset classes, suitable investment options are evaluated. A thorough understanding of how different

products work and the costs associated with them is critical for this evaluation. The most suitable product which

will help you meet the expected returns as estimated in the financial plan is selected.

By growing the money at the expected rate you would be able to build enough financial resources to fulfill your

objectives and needs in life. A lot of individuals invest into an investment option without understanding its overall

long term impact on their lives. Due to this reason they may find out that they are left with inadequate financial

resources during their later years.

They generally have to depend on someone (like their children) or have to drastically reduce their lifestyle to lead a financially viable life. Hence it is extremely important for people to evaluate beforehand, the amount of financial resources they need to accumulate, in order to lead a comfortable life posttheir working years.

8. Monitoring and evaluating your financial plan

The success in financial planning is achieved only when all the financial goals are met. Hence financial

planning does not end as soon as investments are made. It is a continuous process where regular monitoring

and periodic evaluation is necessary to ensure that things are happening as per the plan. It is essential to ensure

that planned contributions from your savings are happening towards your investments.

In addition to this the returns being generated by the investments should be monitored and rebalancing of

investments should be made as per the asset allocation strategy. Based on the above evaluation the financial

plan should be fine tuned if necessary.

Adjustments to the financial plan maybe needed in certain scenarios. Any permanent change in lifestyleover and above the estimated level would impact on your long term financial situation . Similarly anymajor change in your existing situation -- new member added in the family or reduction in income due toone member of the family taking time off from work to raise children -- would require a reworking of thefinancial plan.



Zero-based budgeting

Zero-based budgeting is an approach to planning and decision-making which reverses the working

process of traditional budgeting. In traditional incremental budgeting, departmental managers justify

only variances versus past years, based on the assumption that the "baseline" is automatically

approved. By contrast, in zero-based budgeting, every line item of the budget must be approved,

rather than only changes.[1]

During the review process, no reference is made to the previous level of

expenditure. Zero-based budgeting requires the budget request be re-evaluated thoroughly, starting

from the zero-base. This process is independent on whether the total budget or specific line items are

increasing or decreasing.

The term "zero-based budgeting" is sometimes used in personal finance to describe "zero-sum

budgeting", the practice of budgeting every dollar of income received, and then adjusting some part of

the budget downward for every other part that needs to be adjusted upward.

Zero based budgeting also refers to the identification of a task or tasks and then funding resources tocomplete the task independent of current resourcing.

Advantages of zero-based budgeting

1. Efficient allocation of resources, as it is based on needs and benefits rather than history.

2. Drives managers to find cost effective ways to improve operations.

3. Detects inflated budgets.

4. Increases staff motivation by providing greater initiative and responsibility in decision-making.

5. Increases communication and coordination within the organization.

6. Identifies and eliminates wasteful and obsolete operations.

7. Identifies opportunities for outsourcing.

8. Forces cost centers to identify their mission and their relationship to overall goals.

9. It helps in identifying areas of wasteful expenditure and, if desired, it can also be used for

suggesting alternative courses of action.

[edit]Disadvantages of zero-based budgeting

1. More time-consuming than incremental budgeting.

2. Justifying every line item can be problematic for departments with intangible outputs.

3. Requires specific training, due to increased complexity vs. incremental budgeting.

4. In a large organization, the amount of information backing up the budgeting process may be

overwhelming



Revised Estimates, Indian Revised BudgetEstimates 2008-2009, RE 2008-09

The Indian Budget Estimate for 2008 -09 was initially expected to be

Rs.7,50,884 crore in total expenditure.

Following the announcement of the Indian Interim Budget 2009, this has now been

revised to Rs.900,953 crore, with an increase of Rs.1,50,069 crore. That represents

a pretty significant Budget Estimate increase of 19.9 per cent.

The Plan Expenditure for 2008-09 was initially placed at Rs.2,43,386 crore in the

Budget Estimate. It has now gone up to Rs.2,82,957 crore in the Revised Estimate

presented as part of the Interim Budget - a 16.4 per cent increase.

The additional plan spending of Rs.39,571 crore is due to an increase in the Central

Plan by Rs.24,174 crore and an increase of Rs.15,397 crore in the Central

Assistance to State and UT Plans.

Central Plan Expenditure has increased for Rural Development, Atomic Energy,

Telecommunications, Textiles, Urban Development, Youth Affairs & Sports and

Railways.

The increase in Central Assistance for State and UT Plans is on account of

additional Central Assistance for Externally Aided Projects, Accelerated Irrigation

Benefit Programme, Roads and Bridges, National Social Assistance Programme,

Jawaharlal Nehru National Urban Renewal Mission and Tsunami Rehabilitation.

Non-Plan items have grown Rs.1,10,498 crore in the Revised Estimates through an

increase in expenditure of Rs.44,863 crore on fertilizer subsidy, Rs.10,960 crore on

food subsidy, Rs.15,000 crore on Agricultural Debt Waiv er and Debt Relief Scheme,

Rs.7,605 crore on Pensions, and Rs.5,149 crore on Police.

An additional amount of Rs.9,000 crore has also been pro vided for Defence

expenditure.

Non-Tax Revenues are a key component of IndianGovernment receipts. As against

the Budget Estimates of Rs.95,785 crore for 2008-09, the Revised Estimates for the

Non-Tax Revenues are Rs.96,203 crore, a slight increase.

Actual tax collections during 2007-08 exceeded the Revised Estimates for 2007-08,

both for Direct and Indirect Taxes.

However, for 2008-09, the RE of tax collection is projected at Rs.6,27,949 crore as

against the BE of Rs.6,87,715 crore. This shortfall is due to Indian Government fisc al

measures initiated to counter the impact of global slowdown on the Indian economy,

as part of its stimulus packages.



A relief program of about Rs.40,000 crore has been extended through tax cuts,

including a fairly steep across the board reduction in Central Excise rates in

December, 2008.

Despite this, it is expected that the tax collection in 2008 -09 will still exceed last

year¶s collection.

In summaiton of the variations in receipts and expenditure, the current year is

expected to end with aRevenue Deficit of Rs.2,41,273 crore as against the Budgeted

Figure of Rs.55,184 crore.

The revised Revenue Deficit stands at 4.4 per cent of GDP in the revised Budget

Estimate, against the 1.0 per cent Revenue Deficit in the original Budget Estimates.

The fiscal deficit for 2008-09 has gone up from Rs.1,33,287 crore in the Budget

Estimate to Rs.3,26,515 crore in the Revised Estimate, a very significant 144.9 per

cent increase.

The revised fiscal deficit is estimated at 6 per cent of the GDP as against the

budgeted figure of 2.5 per cent. This is a massive increase rep resenting 3.5 per cent,

and it may lead to a downgrading of India's soveriegn debt.

Public Sector Budget - Indian Interim BudgetEstimates 2009, Public Sector Enterprises

India has created a strong public sector which has evolved in response to the

nation¶s needs and provided stability in development. The Indian Government has

noted that turnover of Central Public Sector Enterprises (CPSEs) in 2003 -04 wasRs.5 lakh 87 thousand crore which has grown by 84 per cent to Rs.10 lakh 81

thousand crore in 2007-08. During the same period, profitsof CPSEs have increased

by 72 per cent from Rs.53 thousand crore to Rs.91 thousand crore.

The contribution of CPSEs to the Central Exchequer by way of dividend, interest and

taxes and duties has recorded an increase of 86 per cent. The number of loss

making enterprises has come down from 73 in 2003-04 to 55 in 2007-08 and the

number of profit making enterprises has gone up from 143 to 158 during the same

period.

In order to maintain ethics and probity in the functioning of CPSEs, the Governmenthas approved the implementation of Guidelines on Corporate Governance in CPSEs

in June, 2007.

In November 2007, Government constituted the National Investment Fund into which

the proceeds from disinvestment of Government equity in Central Public Sector

Enterprises (CPSEs) are deposited. Three-quarters of annual income of the Fund

will be used to finance select social sector schemes which promote education, health



and employment. The residual 25 per cent annual income of the Fund will be used to

meet the capital investment requirements of profitable and revivable CPSEs. As on

December 31, 2008, the corpus of the Fund was about Rs.1815 crore



Financial audit

A financial audit, or more accurately, an audit of financial statements, is the verification of the

financial statements of a legal entity, with a view to express an audit opinion. The audit opinion is a

reasonable assurance that the financial statements are presented fairly, in all material respects, or

give a true and fair view in accordance with the financial reporting framework. The purpose of an audit

is to enhance the degree of confidence of intended users in the financial statements.

Financial audits are typically performed by firms of practising accountants who are experts in financial

reporting. The financial audit is one of manyassurance functions provided by accounting firms. Many

organisations separately employ or hire internal auditors, who do not attest to financial reports but

focus mainly on the internal controls of the organization. External auditors may choose to place

limited reliance on the work of internal auditors.

Internationally, the International Standards on Auditing (ISA) issued by the International Auditing and

Assurance Standards Board (IAASB) is considered as the benchmark for audit process. Almost all

jurisdictions require auditors to follow the ISA or a local variation of the ISA.

Purpose

Financial audits exist to add credibility to the implied assertion by an

organization's management that its financial statements fairly

represent the organization's position and performance to the firm's

stakeholders. The principal stakeholders of a company are typically its

shareholders, but other parties such as tax authorities, banks,regulators, suppliers, customers and employees may also have an

interest in ensuring that the financial statements are accurate. The

audit is designed to increase the possibility that a material

misstatement is detected by audit procedures. A misstatement is

defined as false or missing information, whether caused by fraud

(including deliberate misstatement) or error. "Material" is very broadly

defined as being large enough or important enough to cause

stakeholders to alter their decisions. Audits exist because they add

value through easing the cost of information asymmetry, not becausethey are required by law (note: audits are obligatory in njln;l

Audit of government expenditure

The earliest surviving mention of a public official charged with auditing government expenditure is a

reference to the Auditor of the Exchequer in England in 1314. The Auditors of the Imprest were

established under Queen Elizabeth I in 1559 with formal responsibility for auditing Exchequer

payments. This system gradually lapsed and in 1780, Commissioners for Auditing the Public



Accounts were appointed by statute. From 1834, the Commissioners worked in tandem with the

Comptroller of the Exchequer, who was charged with controlling the issue of funds to the government.

As Chancellor of the Exchequer , William Ewart Gladstone initiated major reforms of public finance

and Parliamentary accountability. His 1866 Exchequer and Audit Departments Act required all

departments, for the first time, to produce annual accounts, known as appropriation accounts. The Act

also established the position of Comptroller and Auditor General (C&AG) and an Exchequer and Audit

Department (E&AD) to provide supporting staff from within the civil service. The C&AG was given two

main functions ± to authorise the issue of public money to government from the Bank of England,

having satisfied himself that this was within the limits Parliament had voted ± and to audit the

accounts of all Government departments and report to Parliament accordingly.

Auditing of UK government expenditure is now carried out by the National Audit Office. Sing industry

(acting through various organisations throughout the years) as to the accounting standards for

financial reporting, and the U.S. Congress has deferred to the SEC.

This is also typically the case in other developed economies. In the UK, auditing guidelines are set by

the institutes (including ACCA, ICAEW, ICAS and ICAI) of which auditing firms and individual auditors

are members.

Accordingly, financial auditing standards and methods have tended to change significantly only after

auditing failures. The most recent and familiar case is that of Enron. The company succeeded in

hiding some important facts, such as off-book liabilities, from banks and shareholders. Eventually,

Enron filed for bankruptcy, and (as of 2006) is in the process of being dissolved. One result of this

scandal was that Arthur Andersen, then one of the five largest accountancy firms worldwide, lost their

ability to audit public companies, essentially killing off the firm.

A recent trend in audits (spurred on by such accounting scandals as Enron and Worldcom) has been

an increased focus on internal control procedures, which aim to ensure the completeness, accuracy

and validity of items in the accounts, and restricted access to financial systems. This emphasis on the

internal control environment is now a mandatory part of the audit of SEC-listed companies, under the

auditing standards of the Public Company Accounting Oversight Board (PCAOB) set up by

the Sarbanes-Oxley Act.

Governance and Oversight

Many countries have government sponsored or mandated organizations who develop and maintain auditing

standards, commonly referred to generally accepted auditing

standards or GAAS. These standards prescribe different aspects of

auditing such as the opinion, stages of an audit, and controls over

work product (i.e., working papers).



Some oversight organizations require auditors and audit firms to

undergo a third-party quality review periodically to ensure the

applicable GAAS is followed.

Stages of an audit

A financial audit is performed before the release of the financial statements (typically on an annual

basis), and will overlap the year-end (the date which the financial statements relate to).

The following are the stages of a typical audit:[c it ati on needed ]

[edit]Planning and risk assessment

Timing: before year-end

Purpose:...

To understand the business of the company and the environment in which it operates.

What should auditors understand?[1]

The relevant industry, regulatory, and other external factors including the applicable

financial reporting framework

The nature of the entity

The entity¶s selection and application of accounting policies

The entity¶s objectives and strategies, and the related business risks that may result in

material misstatement of the financial statements

The measurement and review of the entity¶s financial performance

Internal control relevant to the audit

To determine the major audit risks (i.e. the chance that the auditor will issue the wrong opinion).

For example, if sales representatives stand to gain bonuses based on their sales, and they

account for the sales they generate, they have both the incentive and the ability to overstate their

sales figures, thus leading to overstated revenue. In response, the auditor would typically plan to

increase the rigour of their procedures for checking the sales figures.

[edit]Internal controls testing

Timing: before and/or after year-end

Purpose:

To assess the operating effectiveness of internal controls (e.g. authorisation of transactions,

account reconciliations, segregation of duties) including IT General Controls. If internal controls

are assessed as effective, this will reduce (but not entirely eliminate) the amount of 'substantive'

work the auditor needs to do (see below).

Notes:



In some cases an auditor may not perform any internal controls testing, because he/she does not

expect internal controls to be reliable. When no i nt ernal c ont rols testing is performed, the audit is

said to follow a substantive approach.

This test determines the amount of work to be performed i.e. substantive testing or test of

details.

[c it ati on needed ]

[edit]Substantive procedures

Timing: after year-end (see note regarding hard/fast close below)

Purpose:

to collect audit evidence that the management assertions (actual figures and disclosures) made in

the Financial Statements are reliable and in accordance with required standards and legislation.

Methods:

where internal controls are strong, auditors typically rely more on Substantive Analytical

Procedures (the comparison of sets of financial information, and financial with non-financial

information, to see if the numbers 'make sense' and that unexpected movements can be

explained)

where internal controls are weak, auditors typically rely more on Substantive Tests of

Detail (selecting a sample of items from the major account balances, and finding hard evidence

(e.g. invoices, bank statements) for those items)

Notes:

Some audits involve a 'hard close' or 'fast close' whereby certain substantive procedures can be

performed before year-end. For example, if the year-end is 31 December, the hard close may

provide the auditors with figures as at 30 November. The auditors would audit income/expense

movements between 1 January and 30 November, so that after year end, it is only necessary for

them to audit the December income/expense movements and the 31st December balance sheet.

In some countries and accountancy firms these are known as 'rollforward' procedures.

[edit]Finalization

Timing: at the end of the audit

Purpose:

To compile a report to management regarding any important matters that came to the auditor's

attention during performance of the audit,

To evaluate and review the audit evidence obtained, ensuring sufficient appropriate evidence was

obtained for every material assertion and



To consider the type of audit opinion that should be reported based on the audit evidence

obtained.

[edit]Commercial relationships versus objectivity

One of the major issues faced by private auditing firms is the need to provide independent auditing

services while maintaining a business relationship with the audited company.

The auditing firm's responsibility to check and confirm the reliability of financial statements may be

limited by pressure from the audited company, who pays the auditing firm for the service. The auditing

firm's need to maintain a viable business through auditing revenue may be weighed against its duty to

examine and verify the accuracy, relevancy, and completeness of the company's financial statements.

Numerous proposals are made to revise the current system to provide better economic incentives to

auditors to perform the auditing function without having their commercial interests compromised by

client relationships. Examples are more direct incentive compensation awards and financial statement

insurance approaches. See, respectively, Incentive Systems to Promote Capital Market Gatekeeper

Effectiveness and Financial Statement Insurance

Or

2.0 AUDIT OBJECTIVES AND SCOPE

2.1 Audit Objectives

The following were the objectives for this audit of financial planning, budgeting and

monitoring:

y To provide assurance that CSC¶s financial management framework is adequate,and effectively supports relevant and timely financial planning, budgeting and

monitoring activities.

y To assess the adequacy of the process used to develop annual budgets (i.e.ARLU, NCAOP, Main Estimates) which appropriately reflect CSC¶s

strategic/business priorities and financial requirements.

y To assess the adequacy of the process in place at the National and Regional levelsto allocate resources in a consistent, timely and transparent manner, and aligned

with strategic priorities.

y To assess the adequacy of the financial monitoring process at the National andRegional levels to support timely decision-making on financial matters, including

resource reallocation and other corrective actions.



The specific criteria used for the audit can be found in Annex A.

2.2 Audit Scope

The audit encompassed the financial planning, budgeting (which includes identifying

resource requirements, budget preparation and resource allocation), and monitoringprocesses.

Financial Planning and Budgeting

Internal Audit reviewed the processes which form part of the development of budget

activities to obtain funding to meet CSC¶s resource needs. The audit did not assess the

appropriateness of NCAOP resource standards and indicators, as a review of theresourcing standards is currently being conducted by CSC.

The audit focused on the resource allocation process (including assessing the adequacy

of guidelines, tools, systems and data).

Financial Monitoring

The focus of the audit with respect to the monitoring process was on the preparation and

reporting of forecasts and variance analysis, as well as corrective actions taken whereappropriate.

The audit was national in scope and included visits to NHQ, all regions and selected

institutions/sites/branches (see Annex B). Along with the assessment of the objectives

and criteria noted above, the audit attempted to identify opportunities for improvement,including the potential for CSC to harness best practices that are implemented in specific

regions or institutions.



Employee healthcare reforms in India

Ever since the process of economic reforms was launched in India in

1991, employee healthcare reforms became a part of the government¶s national socio-economic

agenda. In addition to the involvement of the public and private sector corporations, various

government, international and multi-lateral health agencies, and other private stakeholders such as

private health insurers got involved in the reform process.

Particularly, during the middle of the tenth five year plan (2004-05 onwards) the

employee healthcare reforms received a very high priority from the government of India. Now,

the health sector has become one of the key areas, with a major focus on providing

primary health care services. The Employee State Insurance Corporation runs a scheme called ESI,

which provides six social security benefits to employees: Medical benefit, sickness benefit, maternity

benefit, disablement benefit, dependant¶s benefit and funeral expenses. (1)

However, till today one of the handicaps faced in the path of employee healthcare reforms has been

the lack of sufficient evidence based information about, and the impact-assessment of various

initiatives (such as Balika Samriddhi Yojana, Nutrition Program for Adolescent Girls,

Maternal Health Program, etc.) undertaken as part of the reform process. Looking into this weakness,

the Ministry of Health and Family Welfare in conjunction with the World Health Organization (WHO)

Country Office has undertaken a review and documentation of these initiatives in India. This is an

ongoing review process that was started in the year 2004.

The initiatives that are under review are in the area of

employee health care financing, health insurance, healthsystem organization, delivery and

management, public-private partnerships, and reforms related to human resource management in

public and private sector organizations. (2)

As part of the reform process, the government of India is also increasingly adopting alternative means

of financing such as seeking loans from the World Bank and other international financing institutions

to upgrade and manage the labour welfare and health programs (such as National Family Welfare

Program and Employee State Health Insurance Scheme) in the country. At the same time, the

government has encouraged the establishment of corporate hospitals in order to improve the quality

of healthcare. These corporate hospitals have tie-ups with most insurance companies and large

business organizations to provide superior healthcare for the employees. Apollo Hospital chain,



Escorts Hospital, Tata Memorial Hospital, Max Healthcare, and Fortis Hospital chain from Ranbaxy,

are some of the premier corporate hospitals operating across India at present. (3)

At the grassroots level, the government of India has encouraged NGOs to play a pivotal role in

deliveringhealthcare services to the working population. The reforms have been initiated to create aPublic Health and Panchayat system collaboration, special funds have been allocated

for health policy research, and there is a thrust on improving the health dynamics of the working

women. (4)

However, in comparison to the developed economies of the western world, India has a long way to go

in terms of employee healthcare. There are various inherent weaknesses in the national health policy.

For instance, providing employee health insurance cover is not a mandatory requirement in the

private sector in India till now. This is a fundamental weakness of the healthcare system in India that

needs to be addressed urgently. Reforms in this area will pick up more pace when the government

provides incentives and imposes stricter regulations on the employers in both public and private

sectors in India.



Health economics

Health economics is a branch of economics concerned with issues related to scarcity in the

allocation of health and health care. In broad terms, health economists study the functioning of the

health care system and the private and social causes of health-affecting behaviors such as smoking.

A seminal 1963 article by Kenneth Arrow, often credited with giving rise to the health economics as a

discipline, drew conceptual distinctions between health and other goals.[1]

Factors that distinguish

health economics from other areas include extensive government intervention,

intractable uncertainty in several dimensions,asymmetric information, and externalities.[2]

Governments tend to regulate the health care industry heavily and also tend to be the largest payer

within the market. Uncertainty is intrinsic to health, both in patient outcomes and financial concerns.

The knowledge gap that exists between a physician and a patient creates a situation of distinct

advantage for the physician, which is called asymmetric information.

Externalities arise frequently when considering health and health care, notably in the context of

infectious disease. For example, making an effort to avoid catching the common cold affects people

other than the decision maker

Scope

The scope of health economics is neatly encapsulated by Alan Williams' "plumbing

diagram"[7]

dividing the discipline into eight distinct topics:

What influences health? (other than health care)

What is health and what is its value

The demand for health care

The supply of health care

Micro-economic evaluation at treatment level

Market equilibrium

Evaluation at whole system level; and,

Planning, budgeting and monitoring mechanisms.

Health care demand

The demand for health care is a derived demand from the demand for health. Health care is

demanded as a means for consumers to achieve a larger stock of "health capital." The demand for

health is unlike most other goods because individuals allocate resources in order to both consume

and produce health.



The

¡

¢ £

e ¤

escr i¥ ti

¢

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§ i

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es three roles of ¥ ersons in health economics. The ̈

or l

¤

© ealth

epor t

p.

states that people take f our roles in the health care:

.

ontr i¡

utors

.

iti

ens

stewardship)

.

Providers

.

onsumers

ichael

! rossman's

" # model of health production[

$

] has ¡

een extremel%

influential in this field of

study and has several uni & ue elements that make it notable. ! rossman's model views each individual

as both a producer and a consumer of health.© ealth is treated as a stock which degrades over time

in the absence of '

investments" in health, so that health is viewed as a sor t of capital. The model

acknowledges that health care is both a consumption good that yields direct satisf action and utility,

and an investment good, which yields satisf action to consumers indirectly through increased

productivity, f ewer sick days, and higher wages. Investment in health is costly as consumers must

trade off time and resources devoted to health, such as exercising at a local gym, against other goals.

These f actors are used to determine the optimal level of health that an individual willdemand. The

model makes predictions over the eff ects of changes in pr ices of health care and other goods, labour

market outcomes such as employment and wages, and technological changes. These predictions and

other predictions f rom models extending ! rossman's

" # paper f orm the basis of much of the

econometr ic research conducted by health economists.

In ! rossman's model, the optimal level of investment in health occurs where themarginal cost of

health capital is equal to the marginal benefit. ̈

ith the passing of time, health depreciates at some

rate . The interest rate f aced by the consumer is denoted by r . The marginal cost of health capital

can be f ound by adding these var iables: . The marginal benefit of health capital

is the rate of return f rom this capital in both market and non-market sectors. In this model, the optimal

health stock can be impacted by f actors like age, wages and education. As an example, increases

with age, so it becomes more and more costly to attain the same level of health capital or health stock

as one ages. Age also decreases the marginal benefit of health stock. The optimal health stock will

theref ore decrease as one ages.

Beyond issues of the f undamental, "real" demand f or medical care der ived f rom the desire to have

good health

and thus influenced by the production f unction f or health) is the impor tant distinction

between the "marginal benefit" of medical care

which is always associated with this "real demand"

curve based on der ived demand), and a separate "eff ective demand" curve, which summar i

es the

amount of medical care demanded at par ticular market pr ices. Because most medical care is not

purchased f rom providers directly, but is rather obtained at subsidi

ed pr ices due to insurance, the

out-of -pocket pr ices f aced by consumers are typically much lower than the market pr ice. The

consumer sets

B=

out of pocket, and so the "eff ective demand" will have a separate relationship

between pr ice and quantity than will the "marginal benefit curve" or real demand relationship. This

distinction is often descr ibed under the rubr ic of "ex-post moral hazard"

which is again distinct f rom

ex-ante moral hazard, which is f ound in any type of market with insurance).



Health insurance

Health insurance is insurance against the risk of incurring medical expenses among

individuals. By estimating the overall risk of health care expenses among a targeted group, an insurer

can develop a routine finance structure, such as a monthly premium or payroll tax, to ensure that

money is available to pay for the health care benefits specified in the insurance agreement. The

benefit is administered by a central organization such as a government agency, private business, or

not-for-profit entity



Critical Pathways

A Review

Nathan R. Every, MD, MPH; Judith Hochman, MD; Richard Becker,

MD; Steve Kopecky, MD; Christopher P. Cannon, MD;for the Committee on AcuteCardiac Care, Council on Clinical Cardiology, American Heart Association

Key Words: AHA Scientific Statements � critical pathways � clinical protocols

Critical pathways, also known as critical paths, clinical pathways, or care paths, are

management plans that display goals for patients and provide the sequence and

timing of actions necessary to achieve these goals with optimal efficiency.

1As

competition in the healthcare industry has increased, managers have embraced

critical pathways as a method to reduce variation in care, decreaseresource utilization, and potentially improve healthcare quality.

Cardiovascular medicine in particular is an area in which critical pathways have

been embraced. This is due in part to the high volume and high cost associated with

cardiovascular diseases and procedures. In addition, the relatively mature guideline

process has alsocontributed to the growth in use of critical pathways in cardiology.

Although anchored in clinical guidelines, the critical pathway is a distinct tool that

details processes of care and highlights inefficiencies regardless of whether there is

evidence to warrant changes in those processes. Clinical guidelines, on the other

hand, are consensus statements that are systematically developed to assist

practitioners in making patient management decisions related to specific

clinical circumstances.

2Although clinical guidelines can and should

be used in

pathway development, the majority of processes included in a pathway have not

been rigorously tested and are generally not addressed in guidelines. Another term

that should also be distinguished from critical pathways is clinical

protocols.Protocols are treatment recommendations that are often based

on guidelines. Like the critical pathway, the goal of the clinical protocol

may be to

decrease treatment variation. However, protocols are most often focused on

guideline compliance rather than the identification of rate-limiting steps in the

patient care process. In further contrast to critical pathways, protocols may or may

not include a continuous monitoring and data-evaluation component.

Critical pathway techniques were first developed for use in industry as a tool to

identify and manage the rate-limiting steps in production processes.

3 4 5 6

In

industry, any variation in production process is suboptimal. Thus, by defining the

processes and timing of these processes, managers could target areas that were

critical, measure variation, and try to make improvements. Once steps were taken

to improve the process, there would be a remeasurement. In time, variation would



decrease, the time it took to complete the pathway would decrease, costs

would decrease, and quality of production would improve.

When applied to health care, the technique of critical pathways has obvious

concerns. First, unlike in manufacturing, not all variation in patient care is

negative. Individual patient factors

may contribute to variation that cannot andshould not be controlled by the system. For example, if postoperative extubation

occurred within a prespecified time period based on a pathway, there

would be

early extubations with potential for harm. Also unlike in manufacturing, in which

the products are standardized, patients are different and may not fit within a

pathway. Second, there exists concern that streamlining care may have a negative

impact on patient outcomes. For example, if a care pathway suggests a 2-day stay

in the cardiac care unit, a provider may alter care against his or her best judgment

to stay within the plan. Finally, physicians have objected to "cookbook medicine"

and have felt an erosion of professional autonomy with the critical

pathways. Without physician support of the pathway, it is unlikely to achieve

any

of the stated cost-saving or quality goals.

Despite these obvious limitations, the use of critical pathways is being embraced in

many systems. Although designed as a tool for both cost savings and improved

quality of care, it is the former that has been emphasized by managers. Interest in

critical pathways has increased because anecdotal reports of cost savings

have been

disseminated. These reports are best described as case studies and in general have

not followed careful studydesigns. Implementation of the care pathways has not

been tested in a scientific or controlled fashion.7 8 9 No controlled study has shown

a critical pathway to reduce length of stay, decrease resource use, or improve

patient satisfaction. Most importantly,

no controlled study has shownimprovements in patient outcome.3

Lack of careful evaluation has not limited the dev elopment and implementation of

critical pathways in multiple healthcare settings. It is important for cardiovascular

practitioners to understand the goals, development, and implementation of critical

pathways. In addition, physicians must take an active ro le in the development of

critical pathways. By understanding the strengths and limitations of the critical

pathway process, physicians and other practitioners can ensure appropriate use of

these methods. In a review of critical pathways, Pearson et al

1examined the goals

of critical pathways, optimal pathway development, and implementation strategies



Performance-based budgeting

Today, when the management of money is more important than ever for public and private entities,

budgeting plays an enormous role in controlling operations efficiently and effectively. Budgeting in

itself is a familiar process to even the smallest economic unit ± the household - but it needs to be

divided into two different classes: budgeting for public entities and private entities.

This differentiation is important because public bodies need to go through many processes before

moving into the budget execution phase and post-execution analyses; furthermore, the entire process

involves the collaboration of different bodies throughout the government. This collaboration is not only

for budget preparation, negotiation and approval processes, but also for the spending approval after

the whole budget allocation is finalized. Compared to private sector, it is cumbersome.

Another factor is the increasing awareness of the policies of the World Bank in pursuit of restructuring

the budgeting and spending processes of developing nations via the World Bank Treasury Reference

Model. This new model has led the public sector to understand, digest and adopt a new style.

According to this new budgeting methodology, traditional methods of analyzing and utilizing budget

figures are insufficient. In traditional terms, organizations start building up their long-term plans and

break those plans into annual budgets that are formed as forecasts. At the end of the year, budget

figures are compared with actual results and a simple actual-budget variance comparison is

calculated. Since the analysis is simple, this analysis lacks any sophistication in terms of adjusting

similar budget items for forthcoming periods by increasing or decreasing the expenditure estimates.

Basically, variance results are generally used for revising monetary amounts for the next planning and

budgeting cycle, and also for very simple departmental performance tracking.

This new approach to budget analysis and utilization is many steps ahead of traditional methods. As

an example, a governmental project to enhance the social welfare of children in a remote area can

help explain the performance-oriented approach. For such projects, which are generally composed of

long-term plans, governments decide on objectives and the activities that are required to be

accomplished to achieve them. Practical ways of enhancing social welfare of children in a rural area

might include increasing the job skills of parents in the area.

In order to achieve such an objective, the government may plan to establish schooling infrastructures

in various locations, complete with the necessary equipment, and further plan to assign trainers to

those schools for implementing the educational programs. All these activities have a cost aspect and,

at this point, long-term plans are broken down into annual budgets that incorporate the monetary

figures. Once the long-term plans are accomplished, the traditional way to gauge the effectiveness of

this whole project would be to assess the gap between the budget and the actual money spent.

However, with the new budgeting approach, the questions to answer are tougher:



Did we really succeed in enhancing the social welfare of children?

Did this project cost what we expected?

Have we done what we should have done in enhancing the social welfare of children?

Peter van der Knaap from the Ministry of Finance in the Netherlands[4]

suggests: ³The general

purpose of the proposals is to make budget documents and, hence, the budgetary process more

policy-oriented by presenting information on (intended and achieved) policy objectives, policy

measures or instruments, and their costs.´ Furthermore, van der Knaap explains that this type of

budgeting has the following major performance indicators:

(the quantity, quality, and costs of) products and services (output) produced by

government or government services in order to achieve certain effects, and;

the intended effects of those measures (outcome).

Within this kind of a planning and budgeting setup, the lack of reliable information on the

effects of policies emerges as a serious issue. Therefore, it is important to approach the

planning and budgeting cycle in a holistic and integrated way, with collaboration across the

areas of policy design, performance measures definition and policy evaluation.

[edit]Performance-based budgeting (PBB)

This whole framework points us to a newer way of budgeting, the so-called Performance-

Based Budgeting.

As explained by Carter [5]

(as quoted in )[6]

³Performance budgets use statements of

missions, goals and objectives to explain why the money is being spent. It is a way to

allocate resources to achieve specific objectives based on program goals and measured

results.´ The key to understanding performance-based budgeting lies beneath the word

³result´. In this method, the entire planning and budgeting framework is result oriented.

There are objectives and activities to achieve these objectives and these form the

foundation of the overall evaluation.

According to the more comprehensive definition of Segal and Summers[7]

, performance

budgeting comprises three elements:

the result (final outcome)

the strategy (different ways to achieve the final outcome)

activity/outputs (what is actually done to achieve the final outcome)

Segal and Summers point out that within this framework, a connection exists between

the rationales for specific activities and the end results and the result is not excluded,

while individual activities or outputs are. With this information, it is possible to

understand which activities are cost-effective in terms of achieving the desired result.



As can be seen from some of the definitions used here, Performance-Based

Budgeting is a way to allocate resources for achieving certain objectives[8]

,

Harrison[9]

elaborates: ³PBB sets a goal, or a set of goals, to which monies are

³connected´ (i.e. allocated). From these goals, specific objectives are delineated and

funds are then subdivided among them.´

[edit] Achieving PBB

For this type of advanced budgeting, which requires the definition of Key

Performance Indicators (KPIs) at the outset, linking these performance indicators to

resources becomes the vital part of the entire setup. This is similar to the Corporate

Performance Management (CPM) framework, which is ³where strategy and planning

meet execution and measurement´, according to John Hagerty from AMR Research.

This is a sort of a Balanced Scorecard approach in which KPIs are defined and

linkages are built between causes and effects in a tree-model on top of a budgeting

system which should be integrated with the transactional system, in which financial,

procurement, sales and similar types of transactions are tracked. Moreover, linking

resources with results provides information on how much it costs to provide a given

level of outcome. Many public bodies fail to figure out how much it costs to deliver an

output, primarily due to problems with indirect cost allocation. This puts the Activity-

Based Costing framework into the picture..

Both the concepts of scorecards, as first introduced by Kaplan and Norton, and

activity-based costing are today well-known concepts in the private sector, but much

less so for the public-sector bodies«until the advent of Performance-Based

Budgeting! Another conceptual framework that has gained ground is the relatively

recently introduced CPM, again more popular in the private sector. The point is that

the CPM framework has not much touched on the topic of Performance-Based

Budgeting, although the similarities in policies offered by these frameworks are worth

a deeper look. The technical foundation that the CPM framework puts on the table

may well be a perfect means to rationalize the somewhat tougher budgeting

approach, not only for the public sector but also for commercial companies..

[edit]The way to CPM and PBB

Leading companies are integrating various business intelligence applications and

processes in order to achieve corporate performance management. The first step is

for senior management to formulate the organization¶s strategy and to articulate

specific strategic objectives supported by key financial and non-financial metrics.



These metrics and targets feed the next step in the process, Planning and Budgeting,

and are eventually communicated to the front-line employees that will carry out the

day-to-day activities. Targets and thresholds are loaded from the planning systems

into a Business Activity Monitoring engine that will automatically notify responsible

persons of potential problems in real time. The status of the business is reviewedregularly and re-forecast and, if necessary, budget changes are made. If the business

performance is significantly off plan, executives may need to re-evaluate the strategy

as some of the original assumptions may have changed. Optionally, activity-based

costing efforts can enhance the strategic planning process ± deciding to outsource

key activities, for example. ABC can also facilitate improved budgeting and controls

through Activity-Based Budgeting which helps coordinate operational and financial

planning.

The ability to establish CPM to enhance control on budget depends first upon

achieving a better understanding of the business through unified, consistent data to

provide the basis for a 360-degree view of the organization. The unified data model

allows you to establish a single repository of information where users can quickly

access consistent information related to both financial and management reporting,

easily move between reporting the past and projecting the future, and drill to detailed

information.

By then, you are ready to plug in - on the unified data - the applications that support

consolidations, reporting, analysis, budgeting, planning, forecasting, activity-based

costing, and profitability measurement. The applications are then integrated with the

single repository of information and are delivered with a set of tools that allow users

to follow the assessment path from strategy, to plans and budgets and to the

supporting transactional data.

CPM and the adoption of more public-sector oriented PBB are not easy to tackle, but

in the ever-changing business and political climate they are definitely worth a closer

look

fiscal plan

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