How to create a budget for your organisation

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How to create a budget for your organisation

A budget helps us work out what money we have, how much more we are going to get and how much we need to spend.

Large organisations may have very complicated budgets that cover a number of years, many projects and a range of funding sources. Smaller not-for-profit organisations can have very simple budgets. But whether they are complicated or simple, budgets are critically important. They are a tool for making sure that your organisation will have enough funds to deliver the services and outcomes you have planned and that your organisation is solvent – that it can pay its debts.

If your organisation has an executive officer or paid staff they should be able to develop a draft budget for the treasurer and board to consider and change as required.

Here is a step by step guide on how to develop a budget for your revenue and your expenditure.

Start planning in time

It can be a good idea to set a timeline (two or three months) and have a plan for developing your draft budget. Draft budgets are usually developed with input from the executive officer, the treasurer and members of the finance committee, so you will need to plan times for discussion. When your draft budget has been prepared it is provided to all board directors for feedback, input and, when ready, approval.

Budgets are usually approved at the May or June board meeting, to cover the financial year starting in July, so you should start preparing the draft in March or April.

Review your information

Look at your business plan and your strategic plan. Look at last year’s budget.

Get staff involved in setting the budgets for their programs. You might need to do some research to find out how much money they need for the particular projects and activities they plan to undertake.

Estimate your income for the next year

Work out what income can you reasonably expect over the coming year. Make a list of the income that you can rely on (approved grants, interest on investments or rentals, membership fees) and the income you can expect to get from your usual sources (potential government funds, fundraising and donations, sales of goods, fees from services, etc.). If you are continuing with existing programs you can use last year’s figures as a guide.

When estimating sources of income, realistically consider the economic and political climate and the ways it may impact the level of government, donor or fundraising income you will receive.

Be thorough in how you think about these sources of income. Think about the situation of your funders. Has the government announced cuts? Is your local area suffering economically, and will that affect donations? How much will your fundraising activities cost? Have you included an appropriate ‘management fee’ in your grant application? A management fee is charged to cover the overhead expenses you will have in delivering the services you have sought funds for.

Don’t forget to include ‘in-kind’ contributions of goods or services. These might include donated office space, free parking or donated computers.

Once you have added these up you have your projected income for the next year.

Estimate your expenses for the next year

Generally there are four main kinds of expenses: direct costs, staff, capital expenditure and overhead costs. First you need to identify what these are.

Direct costs – are the costs of delivering your projects or activities. They might include travel and accommodation, the cost of printing resources for the project, or the cost of hiring venues for workshops.

Staff costs – include wages, superannuation, professional development and workers compensation insurance.

Capital expenditure – covers purchasing major items such as cars, office equipment or buildings.

Overhead costs – include the running costs of the organisation such as rent, office supplies and utilities (power, phone, IT, water), board costs, cleaning, professional (auditor, lawyer, accountant) fees, staff recruitment, travel, vehicle running and maintenance – everything you need to do to keep the whole organisation running.

You will not know exactly what income you will receive or what expenses you will have. You will have to estimate those figures based on past financial performance and taking into account plans for the coming year.

When estimating, be as accurate as you can, but be conservative. Assume that there is a chance that your income will be lower and that your expenses higher than expected. As an economist once said, ‘make sure your budget has the elasticity you need to accommodate the unexpected’.

Think about money management

If you only want your organisation to be established for a short time you don’t need to worry about building up your assets. But if you want your organisation to last into the future you need to give some thought to building up your assets, including your financial reserves.

For a start, your organisation needs to have enough cash available to it to cover the cost of its operations, meet its responsibilities and pay its bills (available cash is called liquid assets). You also need to put money away in reserve to ensure your organisation can survive a disaster, like a late grant payment or a drop in membership fees.

It is important to plan from day one to have at least three months working capital reserves. That means you can keep paying your staff and other costs when there is a hold up in income being received.

Invested savings can provide a buffer in difficult financial times and will also earn interest for your organisation.

It’s important to get the balance right between investing the organisation’s money and making sure you have enough available to pay staff, operational costs and debts.

Get board sign-off

Make sure the board has the time it needs to discuss and test the budget. Directors will come from a range of backgrounds and organisations and will have experience in preparing budgets for different types of organisations. Use their skills and knowledge.

Monitor your budgets and review them regularly

The budget should be reviewed by the board regularly – usually monthly. At each meeting, the board should have the financial statements that show how much money is actually being earned and spent and how those figures compare to the predictions made in the budget.

If your income is greater than expected and you have spent less, you will have extra funds. But if you are spending more than expected and earning less, you will be losing money.

By reviewing the financials and the budget regularly a board can have the time to change its plans to utilise any unexpected profits. If the organisation is losing money the board can make a plan to either increase income or reduce costs. Either way, the board should be aware of the organisation’s financial performance so it can act to avoid becoming insolvent.

Before making new plans to spend any surplus funds, it would be prudent to wait to the end of the financial year – and to check your funding contracts, because sometime funders will demand unspent funds back.

Ask questions

Ask lots of questions about the budget. As a director you need to know why income or expenses are higher or lower that originally budgeted. That will help you make decisions about what activities the organisation might undertake.

If there is a chance that the organisation is heading for financial difficulty it is important to know early so that problems can be addressed.  

Keep asking questions until you understand what is happening and why it is happening. Remember that you have legal responsibility for this organisation and its financial performance.

Often the questions that you feel uncomfortable about asking will mirror similar concerns of other directors.

[1] This is called ‘incremental budgeting’. There is also ‘zero-based budgeting’, which means starting from zero. Every program and cost centre is re-examined for each new budget to test whether it justifies its existence.