Budgets are vital to run your charity effectively!!

So what is a budget? 

A budget is: 

• a financial evaluation of an organisation’s planned services for the coming year 
• a forecast of income and expenditure which can be used to monitor financial performance in the year ahead 
• a financial plan which may be required by funders 

Why budget? 

A budget is prepared to: 

• ensure that the proposed plan of services to members can be achieved within the finances available 
• ensure that best use is made of finances
• establish a method of checking and monitoring financial performance
• report planned and actual performance to the Management Committee

How is the budget prepared? 

The following model makes these assumptions: 

• The charity has no plans to alter its activities and apply for new grants. 
• Any grant funding received is repeat funding and there is complete certainty it will be received. 

You should prepare the budget in the following four stages, always making sure that it is approved by a full Management Committee at least one month before the commencement of the financial year. 

1.     Expenses 

The starting point for a budget is the Expense Headings which will usually be fairly obvious: 

Example: 

Wages	Who is employed and at what rate?
Rent, rates	How much and when do we pay?
Heat and light	How much will it cost to heat the premises?
Maintenance	Are we responsible for maintenance of the building and are any major repairs necessary?
Telephone, etc.	How much and when do we pay?
Expenses	What is the likely cost of Management Committee      members and employees’ expenses?
Sundries	Make a reasonable judgement about these small amounts, e.g. Petty cash items.

You now have a list and a forecast value of expenses which you should compare with the previous year’s Actuals to ensure that they are reasonable, and that you have not left anything out. 

2.     Income 

You must now construct the Income side of the budget. 
 
This will comprise Guaranteed Income, i.e. income which has already been agreed by a funder or funders, and non-guaranteed income, i.e. income which you plan to raise. 
 
Again, when you have compiled these figures, you should compare them with the previous year’s Actuals to test if they are reasonable. 
 

3.     Comparing Income and Expenditure 

Total income and expenditure should now be compared with each other to establish if there is a forecast surplus or deficit of income over expenditure. 
 
It is sound Financial Planning to budget for a surplus of about 5%, i.e. to ensure that Income exceeds Expenditure by about 5%.  This should ensure that any unforeseen expenditure can be met. 

If there is an adequate surplus then you may proceed to phase the figures, i.e. to analyse the income and expenditure in the month they arise. 

If, however, there is a Deficit it will be necessary either to: 

• seek additional funding 
• organise more fund raising 
• reduce cost by deferring proposed expenditure 

However, BEWARE!  It is not good practice to defer necessary expenditure, e.g. Maintenance – ‘buildings don’t get better’.

4.     Phasing the budget 

Phasing is a most important aspect of constructing a budget.  It involves analysing both income and expenditure monthly.  This is important because, whilst the total budget for the year may show a surplus, it is quite possible to have sizeable deficits in individual months. 

If there is a phasing problem, i.e. if there is deficit in particular months, it may be possible to: 

• arrange for funders to pay half-yearly in advance instead of quarterly in advance    or 
• defer expenditure to later in the year 
  

In any event, this problem must be resolved before the budget is submitted for approval. 

In due course, when a budget has been constructed showing an adequate surplus and a satisfactory phasing, you should submit the budget to the Management Committee for final approval.