Budgeting

In good times, you may have paid relatively little attention to budgeting or to monitoring outcomes against budgets and available resources, apart from project budgets and outcomes that you needed to submit to donors. You will benefit by budgeting all the time, and in difficult times budgeting for the organisation as a whole is essential. Like businesses in difficult times, revenue falls for community and voluntary bodies. Unlike businesses, demand for the services supplied by such groups tends to increase greatly in difficult times.

 
If you manage your finances well, you will be able to spend more with confidence and spend more effectively on your causes. If you do not continue to have funds to operate, you can close down smoothly, providing for clients and staff in an appropriate manner, giving them warning and helping them to find alternatives.
 

Find out as much as you can about what is to happen and use your judgement as an organisation to work out a best case and a worst case scenario... 

 
Budgeting is normally done for a 12 month period, and best done if you can allocate forecasts for each month. If you are doing it for the first time, and do not have monthly accounts for the current year, you will be able to use the annual accounts prepared by your accountant. These will be for the previous year, but are a starting point. If staff salaries cost €50,000 in the last year, and you have more or fewer staff, or have provided an increase or decrease in salaries, you can estimate what the total cost is in the current year and what it is likely to be next year. Then divide it out for each of the 12 months. Then take the next biggest item – maybe fundraising costs for example? What did you spend last year? On what did you spend it? Do you think that you should do the same again this year, or do more/less/something different? What is it likely to cost this year? When are you likely to have events? Allocate costs to the relevant months. Do not spend time initially getting the numbers accurate to the last cent, what is important is that they are good estimates.
 
If you do have monthly categorised accounts for the current year, you will find this task easier as you will have more up to date numbers to work from. Whatever base you are using, make sure that you have a ‘workings sheet’ where you write down all the adjustments you have made for cost/salary increases etc. so that you will have a record of what you have included.
 
When you have gone through all the expenditure items, checked them and spread them over the 12 months, you have your baseline. Now it is time to look at funds coming in. 
 
How much would you expect to earn? Having information as to what you got from collections, donations, events you ran and so on from the current or the last year provides a basis for estimating what you will get in the next year. Then consider if it is likely to be up or down as for expenditure, and divide into the relevant months on your table. This is your initial draft budget.
 
But maybe it has proved hard for you to come up with numbers. Yes, you can work out salaries and fundraising costs etc. on the basis of what you think you are likely, and/or would wish to spend, but you may be much more uncertain about income. Will fundraising raise similar amounts as it did last year for the same/similar kind of events? You can find out from media
comments and reviewing your own experience in recent months what percentage increase/decrease it might be prudent to apply. Are you going to try some new event? Be prudent in the amount of resources you estimate it will raise. When will Government agencies pay you for work done? Will they run the same schemes this year and will they pay for work this year on the same basis as last year? There are huge costs for charities (and ultimately for Government) associated with uncertainty about Government schemes and payment patterns, and you have to provide for it. Maybe you have other major donors – what are they likely to provide in the year?
 
Find out as much as you can about what is to happen and use your judgement as an organisation (this should not be left to one individual) to work out a best case and a worst case scenario. The best case is where the issues which are uncertain work in your favour, you get the money on time to pay for your plans; the worst is where the issues that are uncertain work
against you and you get none of the items that are uncertain, or only a very small amount. Seek to come up with a most likely estimate, and slot in the figures for this and separately slot in the figures for the worst case scenario and see what the results are. Be realistic – do not let your sense of urgency and commitment to delivering services let you overestimate the likelihood of
your getting prompt funding.
 
If the total for expenditure is larger than the total for income, you will need to cut back the expenditure or raise the income. (You may have reserves from earlier years you can dip into - see our article on reserves for further information). Do not do anything unrealistic. If you look at what you have put in for income and genuinely think you could raise more and identify specific actions which you commit to doing, by all means raise the income. If not, you will need to cut back expenditure.
 
The budget exercise should be completed about 3 months before the year end, so that you do not have a period coming up to the year end when you really have no view as to the future beyond those last few months.
 

Scenarios and risk analysis

 
Now look back on the worst case scenario you have prepared. How likely do you judge the risk to be that this will materialise? Think through what would happen if it materialised. Would it have a major impact on your organisation – would you find that you have incurred expenditures that will not be paid for and the organisation would become insolvent, closing down the services you have fought so hard to get underway and to keep running? Is there anything
you could put in place now that would protect the services in a worst case scenario? If you are considering launching new services, you may need to wait to see whether you actually get the money, although this is very difficult when needs are short term and critical. If you are currently running services, it is even more difficult; if you stop running a service until the uncertainty is
resolved, you have staff and other resources which are under occupied and this is very costly.
 
None of the options are easy – finding more funding from other sources, cutting down on the level of service provided, reducing pay, putting staff on part time contracts, layoffs etc – especially in the light of the needs of the clients that you serve, but if the contingency planning is done early, it is likely to be better and more efficiently executed than if it is introduced only when
the cash runs out. You will have made best use of your resources and made them stretch as far as possible.
 
When looking at the risk of something happening, it is helpful to separate out how big the risk is – how likely it is to occur - from how bad it can be if it occurs. For example, if I am trying to decide whether to buy sandbags, I might find out that flooding very rarely happens in my area, but my office is at the edge of a flood plain and no insurance is available. If there is a flood,
the effect would be devastating if I do not have sandbags to keep it from entering the building. The risk is not very big, but it would be very bad if it occurs. I may decide to buy and store them and set in action a policy of going round building sites as they are finishing projects to see if I can obtain a number of sandbags at low prices to meet my needs.
 
If you find it helpful to use graphs to give a picture of risks analysed in this way, it might look like this. Risks here are measured from small to large. You decide where to place a risk on the basis of whatever information you have. It is not an exact science, but it does help clarify issues. Once you have analysed them in this way, you may find it easier to estimate what amount to put in your forecast. For example, if you have a funding source which normally provides €100,000, and you consider that there is a 4 out of 5 chance (very likely but not certain) that they will pay this year, but that the amount is likely to be €80,000, you might put €64,000 in
your draft budget. (80% of €80,000 is €64,000).
 
Ris assessment graph for budgeting
 

The Risks

 
    a - Major funder, large possibility they will not pay this year - very big and bad
    b - Very small funding source, likely to come through - not significant risk
    c - Substantial funder, pretty likely to fund, but will have large impact if they do not
    d - Relatively small funder, very likely not to come through, limited risk
 
You will want to devote most attention to risk (a) which is clearly the most significant for the organisation and its work and to risk (c) where a limited effort may get them over the line, but if they do not fund it would have a large impact. This sort of analysis helps decide on the priorities and you can also use it to estimate what income you would put in your budget. For example, you know enough to know that you will get something from funder (a), but at worst case scenario it will be 30% of what you need and will arrive 6 months late. Put this amount in your worst case scenario budget.
 
This simple risk analysis approach can be used for other uncertainties also, as can scenario planning, but to discuss this is beyond the scope of this note.
 

Cash Accounts

 
In the discussion to date, we have talked about the budget, spending and funds coming in without reference as to whether they are an income and expenditure budget, taking account of non-cash items such as depreciation and putting items in the correct month from an accounting point of view – e.g. when you order something, you put the expenditure into the month you order it in, not into the month when you pay it.
 
If income and expenditure take place smoothly over the year, with income matching expenditure in each month, there is likely not to be a problem with cash flow. For many organisations both commercial and charitable, this is not the case. Some expenditures are regular every month; some take place every quarter or irregularly; income is received in irregular amounts by most
charities, adding significantly to their costs and the risks of their operations. Having a very clear grasp of your cash flow will help you manage your resources and prevent an unexpected and unbridgeable gap opening up which may require you to take drastic and irreparable action to your services and your reputation. It will not, however, solve an underlying problem where you
do not have enough money coming in to cover the costs which have to be paid for.
 
A cash budget is very similar to the budget you have already prepared on a 12 month basis, with some key differences. Add an extra line at the bottom of your excel table for ‘Total cash at end month’ and put on top of the table, above the line for each month, the cash balance coming into the year. Then in the same way as for the budget income and expenditure, estimate the total amounts that will actually be paid into and out of your account every month and calculate the cash balance at the end of every month. The first month’s cash balance will be done by taking the cash balance coming into the year – say it was €100 – and adding the income and subtracting the revenue received in the month. So for example, €100, plus €1000 in fundraising cash received, less €800 costs actually paid out. The total cash at end of month will be €300, and this is the figure you will use to do the same sum for the next month and so on.
 
You will see very quickly if you have a forecast cash deficit in any month, and if you do, now is the time to deal with this. You may visit your bank, armed with your forecasts and letters of commitment from donors if any, to ask them for an (increase in) overdraft for the period you will be in the red. You will get a better reception if you go early to the bank, and if you get a refusal
from them, you have more time to try other options. You may have to cut back on certain expenditures or on new projects until you get beyond the cash deficit period.
 
It may be that you are involved in a multi-year major development project for example and are on bank funding all the time, so that you have a negative cash balance at the beginning of the year. If this is so, there is all the more reason for doing cash forecasts and then see if you could delay or change expenditures to reduce your exposure to bank interest charges.
 
With increasing uncertainty and delay in payment of funds, it is critical that organisations are prudent in their cash flow analysis – assume that income will come in later than it should. The impact of this is to raise your costs to the extent that you have to incur overdraft costs and/or delay work because you do not know if it will be funded or not, or to what extent, making your delivery of services less efficient and effective than they otherwise would be. It is not ideal, but it is better than a sudden cash crisis that stops services completely and may put you out of business.
 

Further Resources

 
Download The Wheel's sample template for a typical budget in a community and voluntary organisation.