West Yorkshire Community Accounting Service

Voluntary Sector Accounting Information

Three easy steps to a sound budget

The best time to prepare a budget is about three quarters of the way through the organisation's financial year; so assuming your financial year-end is March, its time to be thinking about it in January. Just the thing to pep you up from the post Christmas blues!

What is a budget?

Simply, a budget is the plan for the organisation, expressed in terms of money. It is important because it is the foundation of any sound financial system; so if your organisation has never produced a budget before, I strongly advise you to start now…..
A budget enables the committee to carry out its duty of good financial management, by providing a yardstick against which the actual money received and spent can be compared. It also means that you have a clear plan agreed by the management committee, and any material items not in the plan will need to go back to the committee for special authorisation. In this article, I assume the budget is for 12 months although it can be for a shorter or longer period

When to prepare a budget

If your financial year end is 31st March, it is well worth beginning to prepare the budget in January, by which time you should have a report of the money you have received and spent for the 1st three quarters of the current year available (ie the April to December figures). These are useful when making predictions for the following year. The committee should also agree on who is going to do the detailed work on the budget; it could be the treasurer and a staff member together, or a sub-committee could be established for this purpose.

Step 1 -Expenditure

The key question for the management committee in consultation with staff is, what does the organisation plan to do next financial year? You may plan to do more or less the same as the current year, or there may be new developments in the pipeline. When doing the planning, the committee needs to be very clear about the overall objectives for the organisation (as stated in the constitution) and that all of its plans and activities fit into the objectives. These plans can then be costed out in detail by the people appointed to draw up the budget.
If you are continuing with a similar type and level of work as the current year, you can use the same account headings and format for the budget. You should tailor the account headings to your own organisation, but the main headings typically would be:
  • Staff costs
  • Premises costs
  • Administrative costs
  • Activity costs
  • Capital costs
Each will have sub-headings (eg under premises, you might have rent, heating, lighting and water). You then need to go through each sub-heading and consider what factors have affected the current year costs and any factors that may affect the costs next year. For example, in the current year, you may have had some expensive roof repairs done which will not happen next year (you hope!); or your motor vehicle is getting older and will need extra money spending on it next year.

You then need to translate all these considerations into figures based on the actual figures for the current year (obviously before you do this you need to project your three quarters actual income and expenditure for the current year to four quarters). If you have employees it is worth taking particular care over the salaries, National Insurance and pension calculations, because very often this is the main part of the expenditure. Having costed each heading you then need to add on the estimated cost of inflation. Do keep notes on how you have calculated each of your figures as you may need to explain them to the committee or a potential funder.

If you are starting a new project it is well worth talking to other similar projects to gain a more accurate picture of the costs involved; eg if you want to employ a new worker but do not know what scale to put them on, go and talk to projects with workers with similar responsibilities to find out what pay scale, terms and conditions they are on. Obviously, wherever you can, obtain estimates; eg if you want to buy office furniture, get an exact quote for the furniture that you require from the appropriate company. Do not cut corners at this point.

Step 2-Income

With ongoing work, begin by listing all current sources of income such as grants, donations etc. As with the expenditure, consider any factors that have affected these income sources in the current year and any factors that may affect your income sources next year. For example you may know that a particular grant is to be cut for the next year or that you have a big membership drive and expect an increase in subscriptions. Then add on the estimated rate of inflation; but it is important to note that grants may not rise at the same rate as inflation (indeed may not rise at all!) If you are setting up a new project then you should have a clear idea of the amount required from the main funding source(s) that you have identified for it, but you need to consider carefully whether you will need to do additional fund-raising. Considering all these factors you can then work out the estimated total income for the year.

Step 3 -Does it balance?

The next step is to put the total estimated expenditure against the total estimated income and see if they match up. The budget should then be taken back to the management committee and discussed. If there is not enough income to cover the anticipated expenditure, then, assuming the income cannot be increased, the committee will have to rethink its spending plans in order to reduce its expenditure, unless it has sufficient reserves to fund the deficit. This is always difficult, but one of the reasons for doing the budget early is so that there is plenty of time to consider and make these decisions properly. Each item of expenditure should be looked at carefully and prioritised. For example, the management committee may decide that it is more important to set up a particular new activity than it is to keep an existing activity going. Once these decisions have been made, a final draft budget needs to be produced and brought for final approval to the management committee.

How to use the budget?

The budget is a really useful tool for measuring your actual income and expenditure against, so having had the budget approved, don't be tempted to breathe a sigh of relief and bury it in the filing cabinet! To use the budget, a regular report should be produced for the committee by the treasurer which compares the budget with what the organisation has actually received and spent. These are known as management accounts, and act as a very useful early warning system of any potential problems.
 

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