What is in this guide:
Why should organisations use budgets
- Important things to know about budgets
- How to draw up a budget
- How to use a budget for financial management
Every organisation survives by receiving some money from members, donors, fund-raising or selling of services - this is called income. Organisations also spend money to run its programmes and these are called expenses. The budget is a table which shows the actual amounts that the organisation expects its expenses and income to be for a fixed period of time, such as one year. The budget tells you how much the organisation thinks it will need to do its work, where it hopes it will come from and how much money it still needs to find.
The budget is an essential to tool help you run a more effective organisation. In the same way that the government needs to draw up an annual budget, to make sure that all plans and programmes are properly funded, an organisation needs to prepare a budget in careful detail. Budgeting is part of planning - you start with setting your objectives, then you draw up action plans and budgets. [See Guide on Planning]
Unless you know how much money you will need to carry out your plans, and where you expect to get that money from, you may end up halfway through the year with no money to go any further. Preparing a budget forces you to plan your spending and your fund-raising and to be realistic about what you can afford to do. Without a budget there can be no effective implementation.
A budget also serves a lot of other purposes:
- It is a simple way to make financial information accessible to all people in the organisation who need to use it. Each member or staff member should know how much money is available for what part of your work.
- It helps you to understand exactly what your work will cost and what limitations your have so that your plans can be made more realistic.
- It clarifies where your have gaps and need to do more fund-raising. It also helps to write fund-raising proposals based on realistic costing.
- All financial statements should be written in terms of the budget so that it is easier to be transparent and accountable and to ensure that no money is spent on costs that you have not budgeted for.
- It helps members or executive members or management to monitor expenditure throughout the year and to make sure that it is in line with the budget amounts - monitoring should happen every month or two and should be in terms of the budget categories.
- It makes reporting to members or funders much easier since the expenditure can be compared to the amounts that you actually budgeted.
- A good budget can also help to avoid waste. When every amount is carefully calculated, it is easy to see how your money is being spent and to decide whether your are making any unnecessary expenditure.
A budget should be drawn up on the basis of three main factors:
- A budget should always be based on proper plans, drawn up to make sure that you reach your goals for that year. A budget should be the summary of all the costs and income that you will receive that will make sure that your plans are implemented.
- The costs in the budget should be based on your financial statements of the previous year and the budget items should compare the expenditure of the previous year to this year. This will show that your budget is based on fact and experience.
- The budget should be realistic and should also show what income you expect and what income you would still need to raise.
Every budget should contain a number of categories. The two main categories are "Expected Expenditure" and "Expected Income".
Under the Expected Expenditure the categories could be:
- Capital costs - things that you have to buy like computers, cars etc.
- Running costs - expenditure that will help your organisation to run an office and administration to do its work: items like rent, electricity, telephone, hiring of equipment.
- Staff costs - salaries, staff benefits, staff training etc.
- Project costs or operational costs - costs that are linked to the specific projects or campaigns that you plan to run that year. This would include things like buying materials, printing costs, transport costs, workshop costs, catering, media production, venues, sound systems etc.
Under the Expected Income of the organisation you should include categories like:
- Donor funds - list each funder and the amount you expect from them,
- Membership fees - if your members pay fees list the amount you expect to get this year,
- Donations - list the amount you expect to get from small public donations,
- Fund-raising events - if you plan to organise events, list what profit you expect to make and
- Sales - if you sell your services or any products.
The budget should clearly show whether there is a difference between your Expected Expenditure and your Expected Income. If you will get more money than you will spend, this is called an expected surplus; if you will get less money it is called a deficit. When your budget shows a deficit you will obviously need to either cut the budget or do some serious fund-raising to make up the amount.
It is very important to write a budget in such a way that all amounts are justified and explained. For example if you want to spend R100 000 on salaries, you should explain how many people will be employed for how much money. For example:
SALARIES 100 000 1 coordinator @ R60 000 per year 1 administrator @ R40 000 per year.
The budget can be drawn up by anyone in the organisation who is clear about the plans of the organisation as well as the possible income and expenditure. It is usually done by the treasurer, the co-ordinator or director or by a budget or finance committee. Whoever prepares the budget must work together with others, especially people in charge of the programmes of the organisation and people responsible for bookkeeping. Once the budget has been prepared, it needs to be checked and discussed by other members of your organisation such as executive or staff who will be using the money.
Budgets are usually drawn up for one year but you can also draw it up for a few years at a time, or have a budget that is just for a specific project that may only last a month or two. A budget should be used as the basis for any audits that are done of your organisation. Audits are usually done by independent accountants who go through all your financial records to check that the money was spent for what it was intended. A budget is used as the main tool for judging this.
The budget is not simply a document for funders and executives to see whether you have used the money properly. It should be a living tool for financial management. The budget is never set in stone. Circumstances and the needs of your organisation may change during the year and a budget can also be changed if necessary. The overall budget of your organisation is an internal one, and can be amended.
A budget for a specific project that you send to a funder is not so easy to change, since you have promised to do the work that is reflected in the budget and you only have a set amount of money available to do this work. If you want to change a budget that has been approved by a funder, you should only do that in consultation with, and with the permission of the funder.
Sometimes it is necessary to have two different budgets for your organisation. One as the ideal budget that you would like to have and a second one as a minimum budget of the money that is absolutely necessary for your organisation to survive. Often when your draw up the ideal budget, your are not yet sure that your will get all the money your need and a minimum budget will help you to decide which costs can be cut, if your don't manage to raise the necessary funds.
The most important thing that should be written at the top of a budget is, what period the budget covers. It is best to make your budget cover the same period as the financial year of the country or, of specific donors. Usually financial years are from the first of March to the end of February of the next year.
You also have to have to decide how detailed you want to make the budget. There are no set rules for this but generally, the more detail you have, the easier it is to use the budget as a financial management tool. The examples we will show in this section are for a detailed budget. The next step, is to decide exactly what your organisation has to achieve in the next year. This should be based on your strategic planning process. [see Planning Guide for more detail] Once you have a list of activities that will make you achieve your objectives, you should calculate exactly what each activity will cost.
When you calculate expenses, it is important to think of everything that you could possibly have to spend. Also, you should look at your financial records of previous years, to make sure that you are not missing any obvious expenses.
Here are some examples of the expenses that you could have in your organisation:
- Capital Costs
Purchase of vehicles
Purchase of computer and printer
Purchase of property.
- Running Costs/Administration
Service contracts for copiers, etc,
Telephone, cell-phone and fax bills,
- Staff Costs
Pension contribution, UIF and other levies,
- Operational Costs
Transport and other travel,
Here is an example of how a particular expense could be written in a detailed budget - the right hand figure is projected transport costs for the budget year, the left hand figure is actual expenditure in the last financial year. The calculations below Transport, show how you worked out the amount of R20 000:
|Transport:||18 540||R20 000|
|10,000km @ R1 per kilometre - R15 000|
|2 Return National Airfares - R4 000|
|Public Transport - R1 000|
When you are basing your budget on previous expenditure, it is important to take inflation and cost-of- living increases into account. If your inflation rate is 6% you should add about 7% to costs for the next year. If your activities are going to increase from the last year, you will also have to work out how much more you have to allocate to each item.
Under Income in your budget you should use categories like the following:
- Grants from funders - list each funder separately and the amount that is expected from them.
- Membership fees
- Local donations
- Income generated - fees that you charge for your services, sales of publications etc.
- Fund raising events.
You should make it clear in your budget, which of these amounts you have already received, or have an existing a letter of commitment for, and which amounts you are expecting to raise. In the same way that you put the amount spent in the previous year next to your Expenditure column, you should do the same with expected income. This will help to make it clear whether your expected income is realistic.
If you choose not to have a very detailed budget that shows all the calculations, it is very important to have explanatory notes that accompany your budget, where the calculations are clearly explained.
If the work of your organisation is a little unpredictable, then it is useful to include an item called Contingency Fund in your budget. This should never be more than 10% of your overall budget. In your explanatory notes, you should justify the contingency fund by listing some of the unbudgeted expenses that happened in the previous financial year.
It is also useful to include contributions to your organisation that are not financial, at the end of your budget. For example, if a company has promised to donate 2 computers to you, you should include that as a note, at the end of the budget. This gives a full picture of how you will get what you need, even if it is not money.
Before you submit your budget to anyone, double-check all your calculations and make sure that it has been worked out and added up correctly. Check your spelling, make sure that the budget is clearly written or typed, and that it is set out in such a way that it is easy for people to look at separate categories and items. Make sure that you have the dates covered by the budget at the top. At the bottom of the budget, you should write the date when the budget was prepared.
Here is an example of a simple organisational budget for an organisation that runs public education workshops on Human Rights. It includes a column on the previous year's expenditure and income:
BUDGET FOR 1 MARCH 2002 TO 28 FEBRUARY 2003
1. RUNNING COSTS: Rent @ R500 per month 5 490 6 000 Phone @ R333 per month 3 665 4 000 Transport 18 540 20 000 10,000km @ R1 per kilometre - R15 000
2 Return National Airfares - R4 000
Public Transport - R1 000
Equipment hire 1 920 2 400 Copier @ R200 per month 2. CAPITAL COSTS Computer @ R7000 7 000 3. STAFF COSTS Salaries: 100 000 110 500 Coordinator
@ R5000 x 13 mths: R65 000
@ R3500 x 13 mths: R45 500
Levies and benefits: 8090 8 500 4. PROJECT COSTS Publicity: 2 890 3 300 100 posters @ R3
10 000pamphlets @ R0.30
Venue hire 5 010 6 000 30 workshops x R200 Catering; 9 200 10 000 1 000 people x R10 Materials 9 872 10 000 1000 people x R10 5. CONTINGENCY 8 909 9 385 @ 5% of R187 700 TOTAL EXPENDITURE 173 586 197 085
1. DEFINITE INCOME
Funder X 50 000 60 000 Funder Y 45 000 nil Funder Z 45 000 45 000 2. EXPECTED INCOME Membership fees 7 900 8 000 Donations 2 300 2 500 Fundraising 23 900 25 000 TOTAL 174 100 140 500 Deficit -56 585
LIST OF DONATIONS IN KIND: Office furniture 5 000 Free use of meeting venue 2 400 TOTAL 7 400
This budget shows a deficit of R56 583 which the organisation will have to raise. If they cannot do this they will have to cut their costs by that amount.
Once you have drawn up and finalised your budget, it becomes the most important tool for financial management in your organisation. To manage your finances you should:
- Analyse projected income and expenditure and Identify shortfalls and make plans to raise the deficit
- Cut costs if needed
- Monitor monthly spending
Analyse projected income and expenditure
In your budget, you have all your different expenditures first and then all your different sources of income. The budget alone cannot tell you which sources of income will pay for which expenditures.
It is useful to draw up a table that will show this more clearly. Here is an example:
ITEM Funder A Funder B Members fees Funds needed TOTAL Running Costs 10 000 20 000 5 000 5 000 40 000 Staff Costs 20 000 40 000 5 000 35 000 100 000 Project costs 50 000 60 000 40 000 150 000 TOTAL 80 000 120 000 10 000 80 000 290 000
On the left hand side of the table are the items of expenditure: running costs, staff costs, project costs. On the right side are the totals you have in your budget for each of these items. Each source of income is then listed in a column, with the amount from that source that is allocated to each item of expenditure.
So, for example, Funder B in Column 2 will give you R120 000 and is paying for 40% of your salary costs, half of your running costs and R60 000 towards your project costs.
The membership fees in Column 3 will pay for a small part of your running and staff costs, but does not cover any project costs.
Once you have filled in all the columns, you can then add up each item to see whether you have reached the total income that you need to pay for all the expenses you will have in that category.
If there is a shortfall, it should be written in the column, Funds Needed. This is your deficit and is the amount what you will have to fundraise for. Decide if it is realistic and possible to raise that amount and make plans to do so immediately. If it is not possible, your only alternative is to cut the expnses in your budget.
Cut costs if needed
No organisation can plan to run with a deficit. It simply means that at some point in the year you will run out of money, your staff will not be paid, your offices will close and your projects will collapse. If you are forced to cut costs, do it as early as you can so that you can plan to do the least possible damage.
When you are trying to cut a budget, it is important to categorise the different items under expenditure into those that are absolutely essential for your organisation to survive and those that are not essential. This will guide you and help you decide which cuts you can make. When you look at the expenditure items, you should also decide if any of them can be found in kind rather than in money. For example, if you have a salary budget for 10 people, can you budget for only 5 people and use volunteers to do the rest of the work? Or if you have a budget for office furniture, can you try to get donations of furniture from businesses in your area, instead of buying them.
Cost cutting can be difficult and painful. It may involve people losing their jobs or projects closing down. But if you do not have the money you have no choice.
There are two very important rules in financial management for organisations:
- Do not spend on an item that there is no income for.
- Do not borrow money, since you are not a business and have no assurance of income in the year ahead.
You cannot monitor your budget and use it for financial management, unless you have a proper bookkeeping system. [See Bookkeeping guide]. Your financial records should be added up at the end of every month and you should check against the budget to see how much money has been spent in each category.
It helps to divide your budget into the 12 months of the year so that you can tell at a glance whether you are over-spending on an item or not. So, for example, if your budget for telephone costs is R6000 per year, you should spend around R500 per month on your phone bills.
You should monitor spending in two ways:
- The amount spent each month should be checked against the amount allowable in each month, and
- The accumulated amount that you have spent that year should be checked against the amount allowed for the number of months that have passed. It is not good enough to only check the monthly expenditure since you will spend much less in holiday months than in very busy months.
Proper monitoring of your expenses should happen every month if possible, but at least every 2 months at a minimum. When you give financial reports to your executive or your members, it should be done in a format that makes it easy for people to compare the expenditure to the budget. A detailed financial statement is not a very useful way to report, since most people cannot easily understand accounting detail. It is much better to report by showing people the budget, and the amounts spent so far.
For example you can show your running costs like this:
Item Budget Budget for 2 mths Spent 1st 2 mths Difference Phone 6 000 1000 1420 420 Copier 5 000 832 720 -112 Rent 6 000 1000 1 000 nil Insurance 2 400 400 390 10 Total 19 400 3 232 3 530 298
In this example the organisation overspent by R298 in two months. The reasons for overspending on the phone bill should be analysed. There are three options:
- Cut costs on the phone bill
- Change the budget and allocate extra funds from another item
- Find more money for the budget as a whole
If costs cannot be cut, the budget should be changed to accommodate this spending pattern. The best way to re-allocate funds is to do it within a category - so to take from one part of running costs and add it to the phone budget. In this example it would be possible to take some of the copier budget and re-allocate it. It is not always this simple and often the money has to be found by cutting project costs. If donor's funds are involved in the changed allocation, they should be consulted.
If the overspending means that there will be a shortfall of funds, immediate action should be taken to raise more funds.
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