Budgeting basics

A practical guide to financial planning

Why budget?

Many organizations only create budgets when a funder requests one, missing the tremendous value this process brings. Far from being just paperwork, a budget is:

• The cornerstone of any effective financial system.

• A tool that enables trustees to fulfil their duty of good financial management.

• The key element in establishing internal controls.

• A practical way to ensure your organization achieves its goals.

A budget is simply your organisation's plans expressed in financial terms.

Budgets serve multiple purposes - they help you plan, communicate, control, motivate, and monitor your charity's activities and resources.

Getting started

There are different approaches to budgeting - from simply adjusting last year's figures to starting completely fresh. Below is a straightforward process suitable for most charities.

When to prepare your budget

The ideal time is when figures for the first three quarters of the current financial year are available. For example, if your financial year ends on March 31st, you should start budgeting in December or January when your third quarterly reports are ready.

Your trustees should decide in advance who will create the draft budget:

• The treasurer working with senior staff

• A dedicated budget sub-committee

• Another designated group

Setting your budgeting objective

Contrary to popular belief, a "balanced" budget isn't always necessary. Your trustees should establish clear objectives at the start:

• If your reserves are low, you might aim for a surplus to build them up.

• If reserves are higher than needed, a deficit budget might be appropriate.

• Different projects within your organization might have different targets (some surplus, some deficit) while maintaining overall balance.

• Always be careful about restrictions on how certain funds can be used.

The budgeting process

Step 1: Plan your activities

Begin by asking: "What does our organisation want to achieve next year?"

Your answer might be "continue current activities" or may include new initiatives or expansion plans. This question should prompt meaningful discussion among trustees about:

• Your organisation's overall strategic objectives.

• Specific goals for the next 12 months.

Step 2: Calculate expenditure

Put costs to your planned activities, following the format of your accounts:

1. Staff costs

2. Premises costs

3. Administration costs

4. Activity costs

For each budget heading, consider:

• Projected actual figures from the current year.

• Estimated inflation and any planned pay increases.

• Known fixed costs (like rent).

Be as accurate as possible at this stage. Don't artificially reduce costs to make the numbers work.

Step 3: Estimate income

List all current and potential income sources, starting with the most secure:

• Confirmed grants and contracts

• Recurring donations and membership fees

• Trading income

• Potential new funding applications

For each income stream, consider:

• Projected actual figures from the current year

• Possible impacts of inflation

• Known factors affecting each source

Be realistic rather than optimistic when estimating income.

Step 4: Balance the budget

Compare your estimated income and expenditure. If they don't match up, careful reconsideration is needed.

If income cannot be increased, you'll need to prioritize expenditure. Consider:

• Which costs are fixed and cannot be reduced.

• Which planned activities could be delayed or scaled back.

• The impact of any cuts on your charity's core mission.

• Whether using some reserves is appropriate.

Making cuts is always challenging, which is why early budgeting is helpful - it's easier to cut plans than existing commitments.

Finalising your budget

The proposal and decision

When presenting budget proposals to your trustees:

• Explain any significant changes from original plans.

• Ask those who disagree to suggest alternatives.

• Ensure all trustees understand their responsibility for the organization's financial viability.

The final budget should ideally be approved before your financial year begins.

Using your budget effectively

Don't file your budget away once it's approved! It should be a living document that guides your organization throughout the year.

We recommend preparing a quarterly report for trustees that:

1. Shows the budgeted figures for each heading.

2. Compares these with actual results.

3. Explains any significant differences.

4. Comments on whether activities are proceeding as planned.

This regular monitoring gives trustees oversight of both finances and activities, ensuring your charity stays on track to achieve its goals.