Budgeting, is your charity getting it right?

For many charities this is the time of year when the budget process is in full swing. You have produced the first version of the budget, but it will not be the last. The figures need to be verified, challenged and be subject to sensitivity analyst. What happens if income drops by a further 5% or pension rates increase more than expected, or the new project gets delayed for 6 months?

These things need to be considered; budgets are not just about cost control it is about ensuring sustainability and safeguarding the charities assets. Remember cash flows are different to budgets. The latter includes income and expenditure for the year and the former shows when income is physically received into the bank account and when it is actually paid. Due to timing, the results are often different. A charity showing an annual surplus budget may collapse during the middle of the year as funds had not been received yet. Hence why money runs out.

Once you have prepared the figures and the board has agreed on the budget the process doesn’t end there. Actual results need to be compared to budgets on a regular basis. Any variances between the actual and budgeted figures need to be investigated and understood. Do the variances suggest poor cost control, was the budget simply inaccurate or quite possibly has something happened that couldn’t have been foreseen?

In some cases, early action needs to be taken to reflect changes that have occurred. It is perfectly acceptable to flex your budget as more changes occur. Better that than simply continuing to use out of date almost meaningless information.

Before you know it you are starting on the next year’s budget! One common mistake is for charities to simply roll forward the previous year’s budget, with a few considerations for inflation and other circumstances, ignoring the actual results from the prior year.

Full cost recovery

One of the benefits of the budgeting process is getting to understand your costs: vital when considering “full cost recovery”. Charities often undervalue the service they are providing. This is not a problem when you have large reserves to cover the shortfalls but it becomes an issue when reserves are diminishing.

You need to consider the true cost of providing that service. This is not just direct costs but should include a fair proportion of the charities overheads.

Some of the costs often forgotten when calculating full costs are:

• CEO’s time
• Fundraising costs
• Collection of evidence to support impact
• Regulation costs
• Recruitment costs
• Employees or volunteers

There are a number of methods of allocating support and indirect costs. Some examples are time, floor space and headcount. When looking at daily rates remember to take account of holidays, training days and sickness. When looking at new contracts they need to operate on their own merit, it is not just a matter of just chasing income.
However, some activities you undertake do not generate income. You need other projects to cover these costs and hence you need to incorporate this impact.

In summary, good budgeting and proper consideration of full cost recovery aids:

• Sustainability
• Effectiveness
• Maximisation of impact
• Proper discussions with funders/contractors

Good luck in your preparation!

We have a specialist charity team who can advise on insolvency and restructuring matters. If you require support on this topic please do not hesitate to contact us here.

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