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Ten Simple Steps for Charity Budgeting: A Beginner's Guide

Budgeting for a charity organization can be an overwhelming task, particularly for beginners who are unsure of where to begin. It's common to feel anxious or stressed when there's no clear process to follow, and the task can seem insurmountable when there's no prior experience to draw from. However, by following some instructions and being a little patient, anyone can create a budget for their charity. By following a simple 10-step process, you can feel confident in your ability to put together a budget that will set your organization up for financial success. So, let's dive in!

1. Establish a time frame

To ensure that your budget is complete and approved by your board in a timely manner, it's important to establish a clear timeline. Start by creating a timeline that allows for at least two board meetings before the beginning of the next fiscal year to review, discuss, and approve the budget, working backwards from the scheduled meeting dates. While it's possible to accomplish this in a single meeting, some board members may have questions that require additional time to address. Planning for two meetings is a safer approach. If you have well-documented aspirations and desired outcomes, beginning the process 3-4 months prior to year-end should provide sufficient time. However, if this is not the case, additional time may be necessary.

2. Identify the individuals from whom you require input and gather your team

Your budgeting team can include program managers, the Treasurer, key board members, key managers, or it can be a one-person job, but it's preferable to involve more people in the process for better outcomes. This is because budgeting is a planning process and involving more people results in greater buy-in and accountability. Ultimately, you need buy-in from your board and team, so involving them in the budgeting process as much as possible is advantageous.

3. Collect the necessary information

To begin the budgeting process, it's advisable to gather essential pieces of information. First, any planning documents that outline the organization's goals and objectives for the current or prior year, if available, should be gathered. Ideally, some priorities have already been established for the current year. Additionally, it's recommended to gather the current year's year-to-date financial outcomes and estimates for the year-end, if feasible. This information serves as a solid starting point and provides insight into aspects that are likely to remain the same as in previous years.

4. Adopt the same account structure for your budget as you use to monitor actual results

Using different categories for revenues and expenses in your budget than those used to monitor actual results can make it challenging and time-consuming to compare the two and calculate variances. To simplify this process, using the same account structure in your budget as in your bookkeeping and accounting system is recommended.

5. Begin with the information you are most certain about

For certain organizations, the information they are most confident about may vary. It could be revenue, or it could be expenses such as salaries and rent. In cases where organizations have recurring grants, they may begin with revenue since they have been in discussions with their funders and can reasonably predict their revenue for the upcoming year. On the other hand, organizations with numerous full-time employees may start with salaries (and other expenses) to determine how much they need to raise to cover their expenses for the following year. The crucial aspect is to identify which information you are confident in and which you are not.

6. Complete the gaps as best as you can

For the majority of organizations, around 80% of their budget will typically be allocated towards salaries and facilities costs. As a result, in some cases, the majority of the budgeting process will be relatively straightforward. Some organizations may have a clear understanding of their revenue and facility expenses and can precisely estimate their payroll expenditures. The remaining figures are often relatively minor and can be estimated using logical reasoning.

7. Include any relevant notes in the budget document

It is not uncommon for budgets to include revenue that is uncertain or unconfirmed. It is important to include this information in your budget notes to ensure transparency and understanding of the budget's reliability. Similarly, if there are significant changes in expenses from previous years or if some important numbers are based on estimates, make a note indicating that these figures are estimates and subject to change based on experience.

8. Document your assumptions and calculations

Using Excel's note feature or other features, it's highly recommended to document all the estimates included in your budget as it can be useful when analyzing variances and preparing for the next year, ultimately speeding up any subsequent analysis.

9. Aim to create a budget that allows your organization to break even

Budgeting to break even, where revenues match expenses, is the goal for most organizations, although there are cases where small surpluses may be budgeted to build up reserves, or deficits may be budgeted in years where capacity building or significant one-time expenses are needed and sufficient reserves are available.

10. Make sure that your budget is aligned with your priorities, goals, and objectives for the current year

While budgeting for ongoing operations is necessary, allocating resources (both money and volunteer labor) to achieve our goals for the year is equally important, and a crucial factor in evaluating a budget is how well it aligns with our priorities and shows the amount of money spent towards achieving them.

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