A budget is simply a plan expressed in terms of money. Plans help thoughts become reality, intentions become commitments, and actions flow. A budget, kept up to date with regular re-forecasts, can help you manage risk, save money and increase efficiency.
Budgets are a very useful tools and, like all forms of planning, can be used to communicate, control, motivate and monitor. You cannot know exactly what is going to happen in the future, but just going through the planning process itself can reduce the level of uncertainty, anticipate problems, help you to learn from the past and improve your ability to manage day to day activity.
To prepare an operating budget an organisation needs to determine what it wants to achieve in the coming year(s) and then make an estimate of the likely costs and income, allowing some margin for the unexpected. If you have a business plan, use it as an overall structure for the budget. Read more
The best time to prepare a budget is when figures for the first three quarters of your financial year are available. Often the previous year’s income and expenditure is a good starting point for forecasting. Look at the detail and timing of receipts and payments, adjust for inflation (currently 1.8% in the UK) and any changes to your work programme or funding.
Budgeting is an iterative process; an initial plan may go through several drafts before it is finally agreed. However, once you have a budgeting system in place the whole process will become quicker and easier, and the budgets themselves more accurate.
For a new project or organisation, once you have identified the activities create the relevant budget headings then write down how much you think you will spend on each and the reason for that decision. You should tailor budget headings to your own organisation or project, but main headings are typically:
Staff costs (recruitment, salaries, pension, travel expenses, training)
Premises costs (rent, rates, utilities, insurance)
Capital costs (building, equipment, etc)
Office costs (information technology, stationery, telephones, etc.)
Direct costs associated with your planned activities
Lay your budget out to match the way you record income and expenditure, e.g. monthly, and using the same headings. This way you will be able to compare planned with actual figures and adjust the budget accordingly. This is the vital process of re-forecasting that keeps your budget alive as a planning tool. Keeping notes of the assumptions you make when drawing up the budget will make re-forecasting easier.
The importance of cash-flow
Consider preparing a cash-flow forecast as income and expenditure do not coincide and there must be money in the bank to cover expenses as they occur. Cash shortfalls can lead to situations with serious implications such as staff not being paid on time. A cash-flow forecast is usually presented in table form and does not have budget headings. Start by estimating what the total bank and cash balances will be at the start of the year. Then for each month (or week) enter the expected receipts and payments. Receipts minus payments will give the cash remaining for the month. A negative figure means you are forecasting an overdrawn balance, i.e. you are in debt.
Once you have an agreed budget, you may also consider drawing up variations of a budget, typically considering optimistic, pessimistic and most-likely scenarios. A further budgeting technique is sensitivity analysis which involves testing the most uncertain elements for robustness. This entails asking questions such as “What if fuel prices rise by 6% instead of 2%?” “What if we’re given notice to quit this building?” “Can we absorb the x amount of extra costs or cut costs elsewhere?” From this exercise you can prepare different contingency plans that can be switched to depending on events.
Four important aspects to creating budgets that work for you:
Involve as many people in the organisation as possible. Talk to them, observe and ask questions, send out surveys. What are they going to be doing? For how long? Where? And what do they need?
How much are you spending now? In order to forecast expenditure you must have a solid feel for what everything costs.
Refer to your business plan and use the budgeting process to firm up your vision. Plan for likely eventualities - equipment failing or wearing out; changing needs; staff and volunteers moving on.
A budget is a guide, not an ultimatum. Be flexible and re-forecast as often as possible to keep your budget alive and working for you.