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Budgeting for treasurers

Budgeting is simply the process of planning your organisation's finances for a specified period, usually 12 months. It is made up of all the activities you plan to undertake in the next 12 months expressed in terms of money.

In other words, it is a statement of anticipated sales turnover, expenditure, profits and cash flows.

A budget is a key management tool, as many not-for-profits operate without capital or reserves, so operating losses can have a devastating impact. Your budgeting will tell you whether your income is likely to exceed your expenditure, and if so by how much.

The treasurer does not usually write the budget alone. It is prepared in consultation with the board and staff. It may be tempting to hand over the budget to your accountant, but unless they are on your management team, they may not be close enough to your organisation's goals and objectives to do a thorough job.

A common way of determining the budget is to refer to the past period as a baseline - then adjust the revenues and costs by applying a percentage increase for inflation or making alterations for expected changes in prices and volume. Budgets prepared this way are called incremental budgets.

This method has its disadvantages as it does not consider whether activities and costs are still appropriate and if a mistake is made one year, it is likely to be repeated the following year.

With zero-based budgeting, you start from scratch each year and justify spending on a cost-benefit basis. It is not usually practical to use zero-based budgeting for all your activities as it would be too time-consuming, but you should review your activities regularly to see if the costs are still relevant.

A practical approach is to use the incremental approach for fixed costs and a zero-based approach for special projects.

Do some 'what if?' scenarios. What if you need another staff member? What if a crucial board member resigns? What if you lose a grant?

Imagine the worst and the best that could happen financially, then look at how you would cope with it. It may seem odd to worry about the best case scenarios, but a sudden upsurge in demand for your services could place your organisation under financial stress.

Some budgets will be drawn up for the financial year of June to June and others will operate on a calendar year.

Here are the eight steps that Organisation XYZ took to prepare its annual June to June budget:

  1. Looked at last year's income
  2. Looked at the timing of last year's income
  3. Asked, 'What will happen this year?'
  4. Worked out this year's overall figures
  5. Drew up the income side of the budget month by month
  6. Followed the same steps for expenditure
  7. Discussed the options
  8. Presented the budget for sign-off.

The organisation reviewed past records of revenue and income (membership, sales, grants, fund-raising, consultancy, interest), looked at past records of expenditure (room hire, wages and telephone), assessed income and expenditure, predicted increases or decreases in the year ahead, studied timing, noticed when most income flowed in and when regular bills were paid, and lastly, looked at likely variations in the year ahead.

Step 1. Last year's income

Last year's income
  Last year
Federal government 20,000
State government 40,000
Local government 2,000
Other grants 3,000
Total grants income 65,000
Other income
Community events/festivals 20,000
Sponsorship 22,000
Consultancy 48,000
Donations 57,000
Fundraising 29,500
Interest 500
Investment 0
Sales 0
Total other income 177,000
Total income 242,000

Step 2. Timing of last year's income

XYZ looked at when it received various income in the previous year.

Timing of last year's income

Government annual funding

Federal government                          20,000                           5,000 a quarter 
State government                             40,000                   Lump sum in January
Local government                             2,000       1,000 upfront, 1,000 on finish
Other grants                                      3,000                1,000 three times a year
Total grants income                         65,000

Other income

Community events/festivals             20,000                         Festival in March
Consultancy                                   48,000                8,000 every two months
Donations                                      57,000                 10,000 annual Christmas campaign;                                                             47,000 from six large donors
Fundraising                                    29,500                   June car raffle, $25,000;
                                                                           chocolates/ wine bottling/ stall
                                                                                        through year, $4,500
Interest                                             500                                     Paid quarterly
Investments                                           0
Sales                                                     0
Sponsorship                                  22,000       2,000 in July, 10,000 in January,
                                                                                              10,000 in March

Total other income 177,000

Total income 242,000

Step 3. What will happen this year?

XYZ reviewed the organisation's plans for the year and factored in any changes in the pattern of activities from the previous year. It then estimated the effect of any likely changes in income sources or expenditure demands for the coming year.

What will happen this year

Government annual funding

Federal government                            20,000             Lost
State government                                40,000              Same
Local government                                 2,000              Same
Other grants                                         3,000              Raised to 5,000
Total grants income                            65,000

Other income

Community events/festivals                 20,000              Expect extra 5,000
Consultancy                                       48,000              Same
Donations                                          57,000  Add 5,000 for midyear campaign
Fundraising                                        29,500              Same
Interest                                                  500               Same
Investments                                               0
Sales                                                         0
Sponsorship                                     22,000               Down to 18,000
Total other income                          177,000
Total income                                   242,000

Step 4.

This year's figures XYZ looked at the likely figures for the year ahead. The most significant factor was that XYZ will no longer receive a Federal Government grant ($20,000). Even with increased fund-raising and raising more money from community events, XYZ will still have $12,000 less money this year. XYZ's board will have to look at ways of dealing with this impact.

This year's figures

Government annual funding           Last year         This year

Federal government                            20,000              0
State government                                40,000              40,000
Local government                                 2,000              2,000
Other grants                                         3,000              5,000
Total grants income                            65,000              47,000

Other income

Community events/festivals                 20,000              25,000
Consultancy                                       48,000              48,000
Donations                                          57,000              62,000
Fundraising                                        29,500              29,500
Interest                                                  500                    500
Investments                                               0
Sales                                                         0
Sponsorship                                     22,000                18,000
Total other income                          177,000              183,000
Total income                                   242,000              230,000

Step 5.

Month-by-month income budget XYZ drew up the income side of its budget by predicting the timing of each income stream.

Month-by-month income budget

Sample annual budget

Budget for XYZ Community group 2003/4
Income                               July 03          Aug 03          Sept 03         Oct 03
Government annual funding
Federal government
State government
Local government
Other grants
Total grants income
Other income
Community events/festivals
Consultancy
Donations
Fundraising
Interest
Investments
Sales

Step 6.

Month-by-month expenditure budget XYZ followed the same steps for its predicted expenditure, analysing previous expenditure and asking themselves if future costs are likely to remain the same.

Step 7.

Discuss options If your revenue declines or costs increase, options may be:

  • Reduce programs or activities
  • Reduce costs (you must be realistic)
  • Run a deficit (can you do it? Is this sustainable?)
  • Raise alternative funds

By having a realistic budget you will have a rational base to make decisions and to ensure you meet your obligations.

To prepare for your first budget planning session, you will need to study all your income sources and look at where your money goes.

Income sources may include:

Donations: Money from well-wishers will probably be among your top income sources. Your contact list of past donors and future prospects will become a valuable resource.

Special events: A significant proportion of many budgets comes from fund-raising. Many organisations run the same fund-raising events year-after-year, but you also need to watch for new opportunities as the success of your traditional fund-raising activities may vary from year to year.

Membership: Many not-for-profit organisations get a high proportion of their income from membership fees, so it is important to keep a close eye on when memberships fall due, so you can remind your members to renew promptly.

Grants: Many not-for-profit organisations receive grants from philanthropic bodies or from federal, state or local governments. These grants are usually in the form of a contract with agreed outcomes.

A key responsibility in managing contracts is to be aware of the milestones and the reporting and delivery conditions under the contract. Also read the fine print and be aware of the legal and financial implications if you do not meet the contract's specifications.

Be sure to factor into the project budget your own contributions - your administrative costs, the time of your volunteers, the management required from your staff.

It's human nature not to factor in all the little costs, such the time it takes to answer the phone, postage costs, and parking costs.

Remember when you are preparing a project budget for a grant, that unless you are careful your total costs may be larger than the grant request!

Bequests and investments: If your organisation has large bequests - money that needs to be invested, rather than just used in your annual budget - you will probably need to get advice on an investment strategy.

Other income which may need to be invested includes money from events, selling products or services, and sponsorship.

Expenditure sources are either fixed or variable:

  • Fixed costs remain fairly constant and include items like rent, electricity, leases and wages.
  • Variable costs may change from year to year and include items like publicity and advertising, and wages for special events.
  July Aug Sept Oct Nov Dec Jan Feb Mar April May June Total
Government annual funding
Federal government grants 0     0     0     0     0
State government grants             40,000           40,000
Local government 1,000                   1,000   2,000
Other grants 1,500       1,500       2,000       5,000
Total grants income 2,500 0 0 0 1,500 0 40,000 0 2,000 0 1,000 0 47,000
Other income
Community events/festivals                 25,000       25,000
Consultancy   8,000   8,000   8,000   8,000   8,000   8,000 48,000
Donations           10,000         5,000 47,000 62,000
Fundraising             2,500   2,000     25,000 29,500
Interest     125     125     125     125 500
Investments 0 0                      
Sales 0 0                      
Sponsorship             9,000   9,000       18,000
Total other income 0 8,000 125 8,000 0 18,125 11,500 8,000 36,125 8,000 5,000 80,125 183,000
Total income 2,500 8,000 125 8,000 1,500 18,125 51,500 8,000 38,125 8,000 6,000 80,125 230,000
Expenditure
Salaries & Wages (inc. Super) 16583 16583 16583 19083 19083 19083 19083 19083 19083 19083 19083 19083 221,496
Rent 0 0 0 0 0 0 0 0 0 0 0 0 0
Equipment           4000             4,000
Other expenses       700 700 700 700 700 700 700 700 700 6,300
Total expenses 16583 16583 16583 19783 19783 23783 19783 19783 19783 19783 19783 19783 231,796
Profit/loss -14,083 -8,583 -16,458 -11,783 -18,283 -5,658 31,717 -11,783 18,342 -11,783 -13,783 60,342 -1,796

Step 8. Get budget sign-off

Once you have prepared your budget, present it to the board for discussion and sign-off. Record the discussion and ask someone to move that the budget be accepted. Once it has been seconded, the board can vote to accept the budget. Once the board approves the budget, the treasurer is responsible for keeping track of how closely the actual figures match budget expectations.

Last year's income

Agenda Item 8 . Board approval for XYZ's budget

XYZ's budget for 2004/5 was tabled and discussed on 4 May 2004. Areas of concern included the loss of our state grant. We hope to make up some of this deficit by increased fundraising and will also decrease spending on one of our programs, which is now receiving more support from the local community. XXX as treasurer moved that the budget be accepted. YYY seconded the motion and the budget was accepted unanimously.

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