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Playtime at Maxilla Nursery

Budgets

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A budget normally starts as a draft drawn up by one person or a small number of people, which is later approved by a management committee. A draft budget allows an organisation the opportunity to consider its proposed activities for the next year in detail. This is a democratic process, which gives people the chance to determine how, and to what purpose, the organisation is working.

Writing budgets is fairly easy, it involves common sense, a logical approach and simple mathematical skills like addition and multiplication. A basic £5 calculator helps.

Six steps to producing a successful budget

One: producing the budget | Start by making a list of all the expenditure headings (items) you can think of that may be needed by your organisation or project. It is a bit like writing a shopping list. Consider special start up costs like recruitment advertisements and capital costs like furniture, computers, a minibus etc.

Capital items (known as fixed assets) would normally last more than a year. To avoid minor items like staplers being included, one normally sets a threshold of £100 (or a similar amount up to £1000 depending on the size of the organisation) before an item is “capitalised”.

Also think about running costs. These are expenses of a recurring nature such as rent, rates, salaries, electricity, postage, stationery, telephones etc.

Similar items like salaries and employer’s national insurance should be grouped together under the same heading.

Keep running cost headings separate from capital cost headings.

Now make a list of all likely income headings such as membership, subscriptions, grants, donations etc.

Two: filling in the figures | Estimate the cost of each item of expenditure as realistically as you can. Talk to people in similar organisations, shop staff, equipment suppliers, builders and local trade unions for salary scales etc. Catalogues from stationers, office equipment suppliers and companies like Argos (for the office fridge etc.) are very useful.

It is helpful to look at items of income and expenditure as Fixed, Variable and Mixed:

  • Fixed – things likely to remain the same throughout the year i.e. rent and rates.
  • Variable – things likely to change depending on levels of activity i.e. income from hall lettings.
  • Mixed – call charges on phones will vary, but the rental remains the same.

Make a clear note of how you arrived at each figure and on any items you were not sure about. Without the notes you will look back at the figures in a few days and will not remember the assumptions you made!

Now do the same with each item of income – estimate the likely amounts of income from each source. Talk to funders and other organisations. Make notes on how each figure was arrived at. If it is a guess or broad estimate say so.

Three: revising the figures | Show the draft budget to people inside the organisation: workers, volunteers, and management committee members. Make sure you talk to those responsible for delivering specific parts of the service.

Has anything been left out? Are extra headings needed? Missing out a heading is the same as giving that item a budget of £0. It is better to guess than leave something out altogether. At the same time would the budget be simpler if several headings were grouped together?

Check on the items you were not sure about. Is more information needed to improve the accuracy of the estimated figures?

When is the funding likely to be received and when are the activities likely to start? Will inflation affect the budget? It may vary from one heading to another.

Revise the notes. Make sure there is a note explaining how each figure was arrived at. The notes are an important part of the democracy of the organisation. People should understand where all the figures have come from, rather than just trust you with the finances.

Four: options and contingencies | Is the income less than the expenditure? If so, what is the organisation going to do about it?

What if your fundraising is not completely successful and you have a short fall of income? Can activities be scaled down? Would you cancel or postpone the project? Or would you split it into different phases and just start the first phase?

What will happen if some income is late? Should you plan for other unexpected circumstances?

Five: approval | The budget should be presented to the management committee for their comments, alterations and approval.

Six: monitoring and revision | The budget is a very important tool for financial management. Small organisations should compare projected with actual income and expenditure at least every three months. Remember that all unpaid bills including any outstanding taxes must be included in the figures. It may be that income has not been as high as forecast so savings will have to be made, or some activities have not happened leaving money available to be spent on other activities. The budget should only be revised to take account of major changes.

Fine detail

First year | The first year’s budget is the most difficult. A lot of guesses have to be made because there is no historic information. It is sensible to ask similar organisations about their costs, but remember no two groups are the same. Rent could vary considerably between two organisations. It’s very important to include all the likely areas of expenditure. Missing something out is the same as budgeting no expenditure on that item. Be realistic about costs and be prepared not to start a project rather than finance it badly.

Following years | Look at income and expenditure for the last year and prepare a forecast for next year. Adjustments have to be made for changes in levels of activity and for new activities. Inflation may vary from one heading to another. Rent might not increase at all if there is a lease running over several years. Staff may be entitled to an incremental increase of about £500 to their salaries, taking them up a point on the local government scale.

Forecast out-turn| Frequently one produces next year’s budget by estimating the year’s out-turn – total income and expenditure for the year during month 10.

9 mth Actual Forecast 12 mth Out-turn Next Year’s Budget
Salaries 28,000 37,333 38,968
Recruitment 1,200 1,200 0
Training 0 400 600

When preparing the figures above the treasurer has adjusted the nine month salaries to 12 months, added an increment of £500 and inflation of 3%. No more recruitment is expected before the end of the year, and none next year. No training has taken place, but some is expected in the last quarter and more next year.

Budget outline | The following guide gives a simple list of headings. Note that the main charitable activities have been grouped together as a project, but you may have several projects.

  • Staff costs
    • Salaries, N.I., Pensions.
    • Recruitment.
    • Training.
    • Volunteer expenses.
  • Office expenses
    • Book-keeping/payroll.
    • Bank charges.
    • Photocopying.
    • Postage.
    • Print & stationery.
    • Telephone & fax.
    • Insurance.
    • Hospitality.
    • Professional fees/consultancy.
    • Depreciation of equipment.
  • Premises
    • Rent & Rates.
    • Water & refuse.
    • Heat and light.
    • Cleaning.
    • Repairs and maintenance.
  • Direct charitable expenditure
    • Travel.
    • More staff costs.
    • More volunteer costs.
    • Materials.
    • More training.
    • More equipment.
    • Membership subscriptions.
    • Publications.
    • Marketing and leaflets.
    • More property costs.
  • Fundraising
    • Staff, marketing, leaflets.
  • Management and administration
    • AGM and annual report.
    • Audit/Independent Examination.

Income forecast | The budget contains a forecast of income. Typically, at the start of the year some income has been approved, applications have been made for other amounts and some applications will be made during the year.

There is always an issue as to whether to include non-approved income in the budget. This involves some judgement because including it can be very risky, giving the committee a false sense of security. If you are not fairly certain that the grant will be approved do not include it.

In the example in The Carrot some grants relating to equipment and the Summer Play Scheme have not been approved. The treasurer or finance worker has drawn attention to this and made suggestions about what should be done if these applications are rejected. Other applications outstanding have been excluded. There is no firm rule about this.

Income can be restricted – which means it can only be spent on what the funder has stated. A restricted grant for the Summer Play Scheme could not be spent on the term time activities of an after school club. Unrestricted grants can be spent on whatever the trustees decide so long as it falls within the charity’s constitutional objectives.

Funding can also be in the form of grants, service agreements or contracts. (These are described in more detail in CASHFACTS: Fundraising). Briefly, a grant is a gift and it is very difficult to attach penalties for non-performance – however, if it is a restricted grant it must be spent as the funder intended. For example, if you had a restricted grant to run a Fun Day and after reasonable efforts very few children turned up, there would be no penalty. A contract normally stipulates a minimum level of service (maybe 200 children attending the Fun Day and a system for monitoring this). If this number of children do not attend, the organisation could be asked to refund all or part of the contract fee. If the charity is not also a limited company the trustees may be personally liable. Curiously, you can normally apply any surplus (profit) from a contract to anything that falls within the charity’s objectives.

In law there is no such thing as a service agreement: it is either a contract or a grant. But when they are contracts they tend to be a bit softer than formal contracts – however, check the wording.

It is worth pointing out to trustees what type of funding is being received. In the notes to The Carrot example, mention is made of whether the funding is restricted, unrestricted, grant, service agreement or contract.

Sales Income | Generally sales income is unrestricted. When this income is significant you should look at the trend over several years before forecasting next year’s sales.

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Last updated: Mon, Mar 31 2008 - 02:37:31 PM

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