There are a number of decisions to be made before a budget is developed, this page covers:
- Budget balancing
- Programme priorities
- Evolution - static or evolving budgets
- Zero or incremental budgeting
- Ownership and accountability.
Is the budget to be balanced? In other words, will it match income with expenditure?
An organisation that needs to build up working capital might want to project a budget imbalance of revenue and expenses (a surplus). Alternatively, a deficit budget may be acceptable if it arises from investment in future restructuring, for example. However, the organisation will in most cases cease to be viable if there are recurring operating deficits. One exception may be where a policy decision has been made to rely on income from investments, for example, to finance deficits incurred on charitable programmes. The question of the level of organisational reserves required to fulfill the plan must also be addressed at this stage.
An effective budget also allocates the organisation's capabilities and resources to create the maximum beneficial impact.
There might be other, more detailed parameters affecting the budget, particularly when budgeting and forecasting is devolved to individual programme or project managers. For example:
- No additional posts unless fully funded (for example: by external project funding)
- 2.5% growth in non-salaried expenditure, to account for inflation
- Any new programmes must be fully funded (both in terms of direct and indirect costs).
Ideally, budgeting is a cyclical process based on the organisation's long-range plan. This requires time for the budget plans to be fully developed. The lead time for grant requests and multi-year projects must be taken into account, too. Also, there needs to be time to gather reliable forecasting information and to go through an orderly approval process.
So realistic timescales for each element in budget development should be established. As a rule of thumb, preparation budget should ideally begin six months before the beginning of the period to which the budget applies.
Who works on the budget and when:
|Provide plan and budget worksheets||Finance department||5th month of the year|
|Complete first draft plan and budgets||Programme personnel/ department head/directors||6th month of the year (or before)|
|Combine all budgets into one organisational total||Finance deptartment||3 months before year end|
|Review and finalise budget||Chief Executive and Board of Trustees||2-3 months before the year end|
The steps to follow include:
|Step 1. Set goals||Perform strategic planning|
|Step 2. Establish objectives||Identify programmes and activities to accomplish goals|
|Step 3. Design programmes||Describe method of actualising the goals|
|Step 4. Budget preparation and approval||Quantify revenue and expenditures based upon|
forecasts and programme services accomplishments
|Step 5. Monitor progress||Compile reports comparing budget to actual|
No budget, no matter how carefully prepared, ever comes to pass in its original form. A budget is not a static document: there are endless reasons it could have to change.
The issue is, when unforeseen changes occur should the approved budget should be altered or updated to reflect the changing conditions?
The monthly management reports could simply use footnotes to explain significant variances from the approved budget. This would be a useful tool in organisational learning, but it would mean the budget could no longer play a role in monitoring performance.
For this reason, some organisations use a 'living' budget that regularly changes throughout the year as circumstances demand, so long as the 'bottom line' remains the same.
A good solution can be to update the budget on a regular basis (allowing a flexible budget) but to return a separate column showing original forecasts. This retains all the advantages of both flexible and static budgets.
Pros and cons of budget types
|Budget type||Advantages and disadvantages|
In zero-based budgeting the financial planners start from a zero base. In other words, they assume that no programme is necessary and no money need be spent. For a programme to be accepted, it will have to be proven worthwhile and financially sound in an evaluation of all elements of revenue and spending.
An incremental budget, on the other hand, treats existing programmes and departments as already approved, subject only to increases or decreases in the financial resources allocated. The organisation's historical costs are the base from which budget planning starts. The focus of the budgeting process is on the changes anticipated in last year's figures. The planning process has already been completed and the programme priorities established.
What are the advantages and disadvantages?
In zero budgeting, each programme is examined in order to justify its existence, and is compared to alternative programmes. Priorities are established and each cost centre is challenged to prove its necessity. This can make programme managers feel threatened, so budget setters should exercise sensitivity when using the zero-based method.
In comparison, there are dangers in using last year's figures as in incremental budgeting. There is a risk of 'creeping' costs year on year. For example, each year the organisation may take 'last year plus 5%' as its figure and fail to query the basis for the decision. In this way, an arbitrary decision in a given year can continue unchallenged for a decade.
Moreover, basing the budget on the actual results can encourage the practice of spending up to the budget in the last few months, to prevent future cuts.
However, incremental budgeting is often less time-consuming than the zero-based method, and is also felt to be less threatening to programme managers.
The basic budget is a comprehensive look at the entire organisation's projections of income or financial support and its expected expenditures. See model income and expenditure budget.
An endless number of supplementary budgets can be created to meet specific planning and assessment needs. The options might include at least the following:
- Annual, quarterly and/or monthly projections of income and expenditure for the entire organisation, as well as for each of its departments and branches
- Receipts and payments budget
- Revenue projections by type, such as contributors or student tuition
- Individual project, department, branch or other cost centre projections
- Service delivery costs by patient, by student, by member or other client
- Capital additions (buildings or equipment acquisition)
- Investment income (and/or total return)
- Cash flow (short and long term)
- Fundraising event revenue and expenses
- Retail shop sales
- Personnel projections.
The scope and size of the voluntary organisation's programmes and asset base should dictate the complexity of its budgets.
No one person should be responsible for preparing the budget, although the organisation's accounts department should compile and monitor it.
However, a budget straight from the accounts office is of little value to the programme staff. The people expected to accomplish the programmes and the financial goals expressed in the budget must be actively involved in the budgeting process.
A budget should be a compilation of information from all the senior programme and administrative personnel, who have in turn taken account of contributions from the people with whom they work. How far down the organisational ladder the leaders solicit contributions will depend on the organisation's circumstances, structure and resources, but the further the better to ensure accuracy of information and a true sense of ownership.
There will also be a broad range of interested stakeholders, including funders and supporters. Outside funders can sometimes exert considerable influence on the budget: they may want to know if the organisation plans to provide services that are already provided by another organisation in the community; they may try to influence grant recipients to conduct programmes that accomplish the funder's goals.
Read our model income and expenditure budget.
More on involving stakeholders can be found on our involving people section.
For more help with planning your budget try our budget review checklist.
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