A budget is a plan translated into money for a defined period (usually one year). The budget is prepared after you’ve clarified your strategic objectives and annual goals and produced a variety of plans to achieve these goals.
Why should you create a budget?
- Communicate and set financial targets
- Maximise and allocate resources
- Identify and allocate resources
- Establish a system of control.
Before you create your budget
Before you calculate the budget, the following key activities need to take place:
- Forecasts - Use this budget area to ask questions such as, 'it cost XXXX last year, will it cost the same this year?'. Also, use this to gather the more complex information gleaned from other parts of the planning process
- Reviews - Many budgets are drawn up early by applying a percentage increase. This incremental budgeting fails to consider whether costs and activities are still relevant and appropriate. Thus mistakes from one year can too easily be carried forward to the next. Avoid this with regular reviews of your activities
- Evolving adjustments - During the year events can occur that cause or require change, resulting in budgets becoming unrealistic. Budgets have to reflect these new circumstances, otherwise, they will signal or obscure a problem that has been or needs to be resolved
- Clarify who is accountable - The planning process will have clarified who has the power to affect various parts of the budget. They are then allocated responsibility and become the budget holder
- Create clear timescales - Budgets must be completed by the deadline. Realistic dates need to be set to allow those contributing to the budget and those doing the calculations sufficient time to complete their tasks. The timing must also match the decision-making process of funders
- Scheduling - Budgeting is a cyclical activity that must be built into the organisation’s annual diary. It should begin six months before the new budget year
- Technical support - This requires the finance officer (or relevant person) to send out a budget worksheet, which is completed by budget holders; the finance officer is then able to turn the worksheet into budgets, which can be discussed and approved
- Take decisions - You must decide whether to set a balanced budget (one that produces neither surplus nor loss) or a deficit or surplus one
- Budgetary control - The finance team (or other nominated people) must provide timely reports comparing actual results against the current year. (From there, the manager responsible can take corrective action if needed.) This information forms the foundation for the new budget
- Variance reports - The most important aspect of control is variance analysis, which involves the comparison of actual results with budgeted expectations: the difference is the variance and is useful in planning the new budget
- Exception reports - Use exception reports to explain large variance. Small variances should be expected, so avoid overwhelming people with unnecessary information.