Budgeting & Forecasting within the Charity Sector

6 July 2021

Increasingly we’re finding charities and other ‘not for profit’ sector organisations are devoting more time to their budget and forecasting processes. However, this can often be an area where the finance team lacks the technical skills to design and implement an efficient and robust process. With trustees and auditors needing to reassure themselves over the financial future of the organisation, the budget can go some ways to provide the necessary assurances and helps to give stronger evidence for trustees’ consideration in assessing and arriving at a conclusion around going concern.

So, where to start?

There are typically two common approaches to budgeting, ‘top down’ or ‘bottom up’…

The first approach takes an overall view of the income and expenses for the year and allocates these across teams, departments, cost centres and funds etc.

The second, the bottom up approach, asks budget holders for each cost centre (this may be a project, fund raising activity, perhaps a trading organisation) and asks each budget holder to consider the income and expenditure for the next year (and often subsequent years) and estimates what they expect this to be on a month by month basis. These are then consolidated to produce an overall budget that can be reviewed and adjusted as appropriate.

Both approaches are subject to significant estimates and assumptions, but for budget holders to really be part of the process and to “buy in” to the budgets being set, as well as ultimately being accountable, then the second approach is often the option many charities will use.

how to approach the task?

If you simply asked each budget holder for their view of next year, then the finance team would end up with a multitude of approaches and different layouts of information. Without guidance, will each budget holder produce a budget to the same standard, be complete, and provide all the information the finance team needs?

Where we’ve worked with clients to develop a process, we typically help them develop a standard template for each budget holder to complete. This template should include all relevant information to help them prepare the budget for the year ahead. Perhaps containing the previous year’s actual figures and prior year budget as well as the current year to date measured against the budget previously set.

Using history as a starting point will help ensure the budget holders consider and remember the usual pattern of income and expenditure. To this, they can add further detail for anticipated changes.

When all the templates are complete, the finance team should then be in a position to aggregate the detail to allow review of the full budget for the organisation. They’d typically need to consider the impact on reserves, as well as tweak unduly optimistic or pessimistic submissions.

Finally, the overall budgets can then be agreed and go through the organisation’s approval process.

Regular review of the budget against actual performance should be undertaken so action can be taken to avoid problems or identify areas that aren’t performing well.

Our team have a tried and tested methodology to develop budgeting and forecasting processes with clients across a range of sectors and organisations. By using automation and robust templates, the process can be simplified and staff time freed up. We work with organisations to help ensure a good level of reporting, and thus identifies errors and assists the finance team to provide the information required by the trustees in an easy to understand format.

So, if you feel your organisation or charity would benefit from a financial reporting shake up, email our team today.