Budgets – do we really need them?
Screams can be heard across the UK, it’s comes to that time of year again – budget time!
Why is it important to budget? Yes we want to demonstrate good stewardship to trustees, regulators and supporters alike and a budget is a key element of that but there is more to it.
Below I’ve considered some of the values of budgeting, some of the reasons why it is simply ignored by a significant number of charities and how, with the right tool, it can be so straightforward you will wonder what all the fuss was about.
Firstly, let’s look at it from your point of view. We all, to a certain degree, budget in our personal lives. We’re not about to go shopping for an expensive item unless we know we can afford it and we’d typically look at our bank account and make a judgement. However, things aren’t necessarily so simple for a charity. Yes, we will know what’s in the bank but it is likely to we have received restricted donations so how much of our balance is left it relation to those particular funds?
Secondly, in demonstration of our good stewardship, regulators may only require reporting of the Statement of Financial Activities (SoFA) but for others, trustees in particular, a budget gives a clear picture of our ongoing performance against our goals.
Despite the above, for many the whole idea of budgeting is seen as a burden and often ignored or only given a cursory attempt. Why is that?
Many organisations use spreadsheets and will, understandably, find the whole process of creating a budget both laborious and time consuming. Combined with that there is the potential for error – I’m reminded of a spreadsheet that a friend gave me recently with all her business income and expenses that she was using to complete her tax return. ‘Can you just check it for me’ she asked. Good job I did, it was riddled with errors with half of the cells not totalling correctly – the taxman wouldn’t have been happy that she was intending to only pay half the tax she actually owed!
Other organisations will be using accounting solutions and, if their solution provides for it, budget using a tool. The problem here is that many budgeting tools aren’t well designed and you can’t get at the information you really want to work with or budget at a level that you want to.
Example of possible issues are:
1) Does anybody really want to budget for every account or would they rather group them and budget for that group (e.g. budget for wages/salaries, pensions, NI payments, tax payments individually or as a group total)?
2) Do you want to base budget figures on actual historical data or do you want what happened last year to be averaged out? Is it likely that what happened last year will happen in exactly the same way? – unlikely.
3) Then there is a situation where you are a growing organisation and what you actually want to work from is based on what happened in the last month and work forward from there.
4) Is it possible to apply both a % or £ change (be that a positive or negative value)?
5) Can you apply any seasonality to the data? An ice-cream sales person isn’t likely to sell the same in winter as they do in summer – a similar situation may apply to your organisation.
6) Can you prepare a budget for an individual Fund or Activity?
7) Are you provided with the ability to update the budget figures during the year? Things change, you want to be able to accommodate that.
The overriding information required to prepare a budget is your own knowledge of your organisations future objectives and activities and the activities that will be required to meet those objectives. A lot of that will be based on historic information but there may be new things to consider for the budgeted period ahead.
Often a budget is seen negatively i.e. highlighting under-performance (whether that is income too low or cost too high) but that’s good as we know where we have to look at making savings. But don’t forget that it can also show areas of unexpected growth or savings that could be maximised.
At Liberty Accounts we understand all of the parameters that you will need to consider and have the appropriate tools from which you can quickly, and easily, prepare your budgets. The stress is removed and you will have information on which you can make considered judgements.
So, in our view, yes a budget is beneficial as it allows you to demonstrate good stewardship of your organisation and helps you to easily identify areas to address – both weaknesses and opportunities – and consider any changes that you need to make. With the right tool preparing a budget need not be the burden that some consider it to be!
Find out more about Liberty Accounts on their website: www.libertyaccounts.com
Neil Chadwick is the Director of Liberty Accounts.