How to develop an Annual Budget

BUDGET

What is a budget?

A budget is:

• a plan for the coming year

• a financial statement showing the organisation’s activities

• a forecast for the year showing areas of under-funding or weakness

• a management tool for monitoring income and expenditure

• a tool to aid fundraising.

Every financial year proper and realistic estimates of the NGO’s incomeand expenditure will be made by the Executive Director with supportfrom the Treasurer and Finance Committee and presented to the trustees.Some budgetary work is delegated, but final approval and authority lieswith the Trustees. Trustees and staff have a duty to seek best value fromthe expenditure of the organisation

As with strategic planning, preparing an annual budget requires thoughtand analysis, although probably less consultation and dialogue, if it is toreflect adequately the organisation’s financial needs for the year ahead. Itis helpful to refer to certain documents when undertaking the budgetanalysis and forecasting, as outlined in the box below.

WHAT TO LOOK FOR A BUDGET

•It was recommended that organisations cost their fiveyear strategic plan. If this has been done, the costing andprojections should be referred to closely when developing the moredetailed and comprehensive annual budget for the organisation.

• It also helps to scrutinise expenditure against the previous year’sbudget: look for any areas of overspend or underspend, and analysethe reasons for this carefully, to assess whether these items werewrongly budgeted in the first place or whether they were over- orunderspent because of unanticipated changes in programmeactivities, office or management costs.

• Look at the organisation’s annual team work plan and attempt tocost, as precisely as possible, the expenditure likely to come from itsimplementation (ie the activities planned). Look particularly at anyplanned changes in programme activities (for example direct grantsto projects or partner organisations, workshops, staffing, officeequipment and supplies) that will have implications for the year’sexpenditure.

• Analyse the known and anticipated income for the coming year interms of the sums agreed or pledged by funding agencies and anyother monies expected from donations, membership fees, orincome generating activities.

• Obtain estimates for any new items in the budget or for costs thatmay have increased since the previous year.

DRAWING UP THE BUDGET

1 Define the parameters. What period will the budget cover (eg April1-March 31)? What currency will be used?

2 Identify all direct expenses, indirect expenses and sources ofincome for the budget (but not yet their amounts). Divide them intothe following categories and subcategories:

• direct expenses (project staff salaries, project equipment andmaterials, project expendable supplies, and other project directexpenses)

• indirect expenses (salaries, office equipment and materials,office supplies, and other indirect expenses)

• income (include all sources, including membership fees,donations, grants from funding agencies, service contracts).

3 Code the items listed in Step 2. There are many ways to codebudget items (eg, see the sample budget, Appendix 21).

4 Transfer the items to the budget itself. Be sure to include:

• expenses heading along the side of the worksheet

• direct expense subheading – code and item titles – the actual direct expense items (from step 2)

• indirect expense heading – code and item titles (same as under direct expense)– the actual indirect expense items (from step 2)

• Line for total expenses

• income heading

• actual income items (from step 2)

• Line for total income

5 Consolidate the figures.

• Establish costs for each item based on the budget analysis andestimates.

• Calculate the sums across the rows and down the columns ofthe worksheet for the expenses.

• Transfer income figures on to the worksheet.

6 Calculate any surplus or deficit. Analyse the results.

For many organisations the first draft of the annual budget will reveal asignificant gap between planned expenditure and known or anticipatedincome. It is important that in the second draft the difference betweenthese two sets of figures is zero. This form of ‘zero budgeting’ is by farthe safest principle from which to work, but it is likely to mean takingitems of expenditure that are lower priorities off the budget, at least untiladditional income is guaranteed. If the organisation’s income base isweak or insecure, it is best to undertake a budget review and updatequarterly so that, with the approval of the governing body, any newincome and hence expenditure can be incorporated. The differencebetween income and expenditure in the overall budget should always bebrought back to zero.

How to develop an Annual Budget

How to develop an Annual Budget