That budgeting feeling…

Now that the festive season is behind us, some charity finance teams may be experiencing a different, more sobering feeling (often one of dread) as budgeting season approaches.

Of course, to keep your charity’s finances on track over the course of each financial year you need a realistic and informed budget. Starting the budgeting process earlier, rather than later, puts you in a far more effective position when it comes to key milestones, such as applying for funding or reviewing your staff costs budget for the coming year.

If you haven’t already done so: now’s the time to start budgeting for 2017/2018.

Planning in uncertain times

Good budgeting is all about dealing with uncertainty. You may start the year with an overview of the funds brought forward from the year before and the levels of cash in the bank, however, with those precious general funds being vulnerable to fluctuations in voluntary income and core costs, preparing sound budgets and clear financial targets early means you’re prepared for the financial challenges which could be encountered further down the road.

That means answering some clear questions upfront:

  • What are your charity’s core objectives for the coming year?
  • What activities will be needed to deliver on these objectives?
  • What resources will be needed to complete these projects?
  • How much will these resources cost?
  • Where will the funding to pay for this come from?

With one eye on guidance updates from the Charity Commission for England and Wales, demonstrating sound charity governance and a best practice approach to financial management has never been more topical.

Top tips for a sound budget

Whether you adopt a zero-based budgeting style or simply take last year’s actuals and adjust for inflationary increments and changes in core activities, additional factors such as the complexity of your funding structure, internal departmental reporting needs and time available to you, will all affect your budget collation.

With so many issues vying for prioritisation as you work through the process, it’s important to be mindful of the following:

Chart of accounts – fit for purpose?

Now’s the perfect opportunity to have a tidy and streamline your chart of accounts (COA) to remove any old codes and bring it in line with SORP 2015 reporting requirements. Aligning your management accounts with year-end reporting increases trustee familiarisation with statutory formats and your funder reports will mirror your presentation in the financial statements. Crucial to avoid misalignment in subsequent performance reporting against budget, due to a COA being adapted after a budget has been signed off.

Income generation strategy

A common question I get asked is “if it’s not secured income should I include it in my budget?” Preparing a budget based upon what you are guaranteed to receive – e.g. regular donors, existing grant instalments – means you can spot your fundraising gaps.

However, if your organisational budget projects a deficit for the year how are you going to fill that? You may consider donor acquisition and voluntary income generation. Are any specific staff posts potentially eligible for funding?

When setting targets for your fundraising team, be realistic and considerate of how income generation can be complimented by sensible cost control measures.

Projected funds and associated transfers

Your budget should clearly set out your projected funds position for the end of the financial year in question – split between the different fund or project types – i.e. restricted, unrestricted, endowed.

Are any of your projected funds in deficit? Are these to be funded from general funds? Should you reconsider any element of unfunded activity? What about surpluses? Is there a possibility of any funding needing to be repaid to the funder? Was there an element of core cost contribution within a restricted fund, which could be released to general funds?

Free reserves calculation

Free reserves are generally defined as any part of general unrestricted funds not available for spending (e.g. those tied up in fixed assets or ring-fenced as designated funds).

No charity budget would be complete without a projection of your free reserves calculation at the end of the year, benchmarking this against the charity’s Reserves Policy.

Cash flow forecast

A budget is great but a budget supported by a cash flow forecast is even better. Converting your predictions to a cash equivalent and being able to monitor peaks and troughs in working capital is essential to the successful financial management of any charity.

Success for your charity is about achieving outcomes, not making the biggest annual surplus you can; however, as we all know, proper planning helps prevent poor performance. Make your plan a good one.

This blog is adapted from an article originally featured in AccountingWEB, December 2016.