WHAT IS A BUDGET? A budget is a document that translates plans into money - money that will need to be spent to get your planned activities done (expenditure) and money that will need to be generated to cover the costs of getting the work done (income). It is an estimate, or informed guess, about what you will need in monetary terms to do your work. Why is it important for an organisation, project or department to have a budget? The budget is an essential management tool. Without a budget, you are like a pilot navigating in the dark without instruments. The budget tells you how much money you need to carry out your activities. The budget forces you to be rigorous in thinking through the implications of your activity planning. There are times when the realities of the budgeting process force you to rethink your action plans. Used properly, the budget tells you when you will need certain amounts of money to carry out your activities. The budget enables you to monitor your income and expenditure and identify any problems. The budget is a basis for financial accountability and transparency. When everyone can see how much should have been spent and received, they can ask informed questions about discrepancies. You cannot raise money from donors unless you have a budget. Donors use the budget as a basis for deciding whether what you are asking for is reasonable and well-planned. Who should be involved in budgeting? Budgeting is a difficult and responsible job. Your organisation’s ability to do what it has planned to do and to survive financially depends on the budgeting process. Whoever does the budgeting must: Understand the values, strategy and plans of the organisation or project; Understand what it means to be cost effective and cost efficient (see Glossary of Terms); Understand what is involved in generating and raising funds. To ensure you have all these understandings, it is usually a good idea to have a small budgeting team. This may only mean that one person does a draft budget which is then discussed and commented on by the team. Where staff is competent to take full responsibility for the financial side of the organisation or project, the following would normally be involved in the budgeting process: The Finance Manager and/or Bookkeeper; The Project Manager and/or Director of the organisation or department. Where staff lack confidence to do the budgeting, then Board members can be brought in. Some Boards have a Finance Committee or a Budget Sub-Committee. It is a good idea to have someone on your Board with financial skills. S/he can then help the staff with budgeting. The budget is the business of everyone in the organisation. At the very least, senior staff should understand the budget, how it has been drawn up, why it is important, and how to monitor it. Where an organisation has branches and/or regions, or several departments, then each branch, region or department should draw up the budget for its own work. These budgets then need to be consolidated (put together) in an overall budget for the organisation. Each branch, region or department should be able to see how its budget fits into the overall budget, and should be able to monitor its budget on a monthly basis. Financial monitoring works best when those closest to the spending take responsibility for the budget. DIFFERENT BUDGETING TECHNIQUES The two main techniques for budgeting are incremental budgeting and zero based budgeting. Incremental budgets are budgets in which the figures are based on those of the actual expenditure for the previous year, with a percentage added for an inflationary increase for the new year. This is an easy method that saves time but it is the “lazy” way and is often inaccurate. This budgeting technique is only suitable for organisations where each year is very similar to the previous one in terms of activities. Very few dynamic organisations or projects are so stable that this budgeting technique really works for them. In zero based budgets, past figures are not used as the starting point. The budgeting process starts from “scratch” with the proposed activities for the year. The result is a more detailed and accurate budget, but it takes more time and energy to prepare a budget in this way. This technique is essential for new organisations and projects, but it is also probably the best route to go in a dynamic organisation that is proactive in taking on new challenges