The step-by-step guide to a charity budget

With exorbitant energy prices and runaway inflation, everyone is feeling the pinch. For charities, making the most out of charity donations and other types of income is essential, along with cost control.  

 

Putting that all together, here, our step-by-step guide to a charity budget cracks open the best tips, tricks, and advice.  

 

 

Learn how charities make money  

 

Before thinking about creating a charity budget, examine how income is generated. Know the different sources of income. For most charities, donations, legacies, and grants are the bulk of the revenue lines. The important part here is to consider how consistent income has been over the past few years.  

 

 

Think about any restrictions on spending 

 

There are restrictions on how income may be spent. Government and foundation grants often come with strings attached. The funding is typically ring-fenced ensuring a certain project takes off or that targets are met.  

 

Regular donations are ‘unrestricted’ income, which means that this money can be spent on anything that the charity decides. These rules form the basis of how money is allocated. 

 

 

Understand how a charity spends money 

 

Understanding how charities spend money is crucial. How Charities Work puts it simply. In addition to the cause there are other legitimate costs. These include governance, fundraising and trading.  

 

For many organisations, spending money on fundraising is different than that spent on trading. In the former, spending money to fundraise may cost less than the money spent on ensuring that a trading shop is profitable.  

 

Ultimately the amount of money that’s left for charity purpose impacts the proportion of spending on cause.  This metric is important for budgeting and impact reporting.  

 

 

Prioritise how income can be spent 

 

Prioritising between needs and wants is one of the first steps to creating a charity budget. Needs are items which are unquestionable. Salaries, rental costs, and items to keep the charity running are non-negotiable.  

 

Wants and ambitions are projects and budget items which may be delayed and are non-essential. These items include digital upgrades and spending not related to maintaining operations.   

 

 

Budget for the essentials 

 

Budgeting for the essentials is the first priority. This includes salaries, rental costs, fuel, and anything related to core operations. Finance managers should examine key contracts and any increase clauses.  

 

Rogers Spencer, an accountancy firm, suggests anticipating rising base costs. They say: “Look over your expenditure from the last financial year and use those to predict the costs you are 100% sure will come up – for example, rent and other regular outgoings.” 

 

 

Make room for nice-to-haves 

 

Special projects help charities improve their efficiency. They may in the long-run increase fundraising opportunities. But spending money now may be challenging. Accountancy firm Kreston Reeves offers advice without sacrificing the initiative.  

 

They say that estimating full ‘cost recovery’ gives charities a chance to understand their full value. Within a project, especially one funded by extra income, don’t forget to allow for:  

• The cost of the CEO’s time 
• Fundraising expenses 
• Impact reporting 
• Regulation and compliance costs
• Recruitment costs
• The value of volunteers  

By building in these cost recovery details, the true price of nice-to-haves is justified by budget sponsors.  

 

 

Don’t forget about inflation 

 

A budget is a future financial plan of action. The Times Newspaper explains inflation and the impact on expenses and savings. By looking at both the Consumer Price Index (CPI) and Retail Price Index (RPI), finance professionals get a good gauge on how prices will change over time.  

 

Check out the Bank of England’s monetary forecast to see what figures you can plug into the budget over the next few years.  

 

 

Budget with purpose in mind 

 

“Don’t budget like a business,” says Gerrard, an accountancy and financial consultancy firm. Instead, it advises: “When profit is not your core objective – and delivering on your charitable purpose is – the way you look at your budgeting changes.”  

 

Their approach to the accounts is to use the top-down approach. Start with a central pot of money and divide down towards each department, expense group, or project. From this perspective, prioritise must-haves, followed by non-essential items. Don’t forget to add a little ‘wiggle room’ for expenses that might pop up unexpectedly.  

 

 

Engage with trustees 

 

Trustees and board members bear the responsibility of the financial statements and budget. Engagement with them is key to building the budget. Ask them where they see fundraising going, whether there are any big grants on the way, or if any large cost items lay ahead.  

 

 

Use digital to keep track of things 

 

Last, turn to digital resources to help you manage your budget. Financial management systems automate the mundane parts of budgeting with accuracy and faithfulness. Digital resources are your friend.  

 

Start with the Small Charities Programme. You can find webinars, tips, and pre-populated budgeting templates.