The basics of charity budgeting

Taking things back to basics, budgeting is a core skill that can provide huge value. From deciding on project costs to managing the organisation, budgeting helps charities to plan for the future.

At the board and trustee level, the UK Government says that charity leaders need to have “realistic plans based on how much money your charity currently has; plans to raise; and plans to spend each year”. The focus is on reconciling any differences between what’s expected versus the money being spent.

Budgeting 101 for charities here takes a practical approach – no complicated forecasting or number crunching. Let’s dive in.

Decide on the approach

Generally, finance teams take one of two approaches: bottom-up or top-down. The rationale behind choosing one is to make sure that the methodology stays the same across each budget period.

Fortus explains the two methods. The top-down approach takes total sums at the highest level and apportions this out across various teams. The bottom-up approach does the opposite. Finance teams ask each budget owner for an estimate and find an overall figure.

While both work for budgeting purposes, it’s important than when choosing a methodology to be consistent about how incoming money and costs are looked at.

Needs, wants, savings, and repayments

Charities, like any small business, are pulled in all directions when it comes to spending money. One helpful strategy in sorting out how to allocate income is to think about needs, wants, savings, and debt repayments.

By prioritising what’s required versus ambition, finance managers can wisely disperse funds.

The best guess is evidence

Taking a stab at forecasting is not about swaying whichever way the wind blows. The best start to an accurate budget is to look at what costs have been incurred. The NCVO offers practical advice. They say that to make an accurate prediction, follow three steps:

• Gather evidence: This is particularly true where costs have been recognised, so you can factor in any contracted increases
• Intelligence: Ask teams whether anything has changed that may impact the bottom line
• Best guess: Marketing sizing, or cost per unit is a good gauge of cost for a budget

Diversification mitigates risk

Planning for new projects and years ahead means ensuring that income grows or remains stable. When budgeting, we recommend building in different sources of income, from grants, donations to legacies.

That way, circumstances which may negatively impact one income segment doesn’t necessarily cause others to decline. 

Use a financial management system

Rather than do all the number crunching and forecasting, a financial management system can automatically generate a budget for you. Xero is the system of choice for small charities or those with simple operations. The budget functionality works well once the expenses are known – simple assumptions can be programmed.

The other benefit of using a financial management system is that finance managers will be able to keep track of expenses from previous periods.

Automate the expense process

Another great way to budget is to offload the process to the machine. Automating financial processes means fewer mistakes and less time to perform the task. Boring, repetitive tasks are eliminated from someone’s workday.

With automation, budget holders can examine expenses in detail without having to enter in data. SAP Concur and Zoho both have auto-scanning capabilities, reducing manual input errors.

Plan for adjustments

Our top tip is to plan for wiggle room. When creating a budget for any organisation or project, plan for things to go wrong. Setting aside income for extra expenses is prudent. This could be in the form of an additional month’s office rent, salaries, or otherwise.

Be strategic about expenses

Expenses can seem like they are endlessly increasing. The switch to hybrid working, however, has transformed expectations of what was once essential. In fact, hybrid working offers money-saving opportunities like never before.

Charity Excellence Framework says to review existing contracts. They ask: “When did you last review your most expensive contracts to see if you’re still getting a good deal and if you still need everything you’re paying for?”

Put in context, Charity Excellence Framework points to rental agreements, accommodations and contracts with long terms. By examining break clauses and negotiating with landlords, charities can grasp savings.

Get help

Despite all the good tips here, digital resources drive budgeting know-how even further. To get started, check out Small Charity Finance’s webinars. The first teaches audiences how to write a budget and the second about cash flow forecasting.

The NCVO’s section on finances includes an Excel spreadsheet download for budget holders. Our top tip here is to reach out and ask for help where you’re struggling – many accountancy firms also advise on charity finance management.

For more on finance, check out our recent podcast: