No one can 100% predict the future. And certainly, no one can predict what lies ahead for the charity sector.
We can simply work with what we do know and use scenario planning alongside budget forecasting to help future-proof charity finances.
Budgeting is, of course, a huge task for charity trustees, and it should absolutely be a strategic exercise that goes into more depth and detail than a task that is carried out once a year by the finance person.
Instead, it becomes a balancing act between needs and wants that all trustees must manage continuously, budgeting with purpose in mind.
In this post, we look at budgeting beyond the numbers, focusing on how charities can move beyond simply asking “are we on budget?”
Budgeting in charities
Budgets are crucial for charities:
- You use them to guide decisions throughout the year.
- They are essential for identifying different sources of revenue, e.g., fundraising, donations, grants.
- They highlight how you spend your money.
- They keep you compliant!
However, we know that there is considerable financial pressure placed on charities, and we understand that budget constraints and changes to finances can and do happen at any time of the year, not just at year-end.
Common budgeting mistakes
Some of the most common budgeting misconceptions we’ve come across over the years include:
Believing that charity budgets are static
As much as we would love a budget to be set in stone and stay that way for the entire 12-month financial period, we also know the reality is this never happens.
The charity sector, from a finance perspective, is incredibly volatile, and as such grants can be awarded, funding can be pulled, and donations can vary at any given time.
Matched with fluctuations in expenditure, budgets are the most fluid aspect of running a charitable organisation.
This is why we place emphasis on setting budgets at the start of the financial year but also reviewing and devising cash-flow forecasts on a rolling 13-week basis.
Producing cash flow forecasts this regularly can serve as an early warning tool for charities, exposing risks and allowing you to put mitigations in place.
Not taking into account other expenses in project grants
Grants take a considerable amount of time and resources to write and receive. However, when they do arrive, they can be a significant boost to your finances, but only if within your bid you have accounted for all resources – resources such as the estimated project overheads and administration costs associated with this specific project.
These costs must be taken from the grant funding, as if not, they will affect your overall budget where these costs have not been accounted for.
There is no dedicated finance person
Often there is limited resource or time to manage accounts as effectively as possible. This can often lead to poor cash flow management and inconsistent bookkeeping, which as a result can lead to bad decision-making and even opportunities being lost as you don’t have a clear financial picture.
With limited financial controls, you will lack the clear oversight into the performance of the charity and what is and is not sustainable moving forward.
Having a dedicated accounts person or outsourcing your accounting function can help ease this pressure and provide you with the right updates and help keep you on financial track.
There isn’t a clear line between restricted and unrestricted funds
We talk about restricted and unrestricted funds a lot. It’s a big part of charity finances and one which needs managing with considerable precision in order to keep within the rules and on the right side of charity governance.
Restricted and unrestricted funds must be kept separate and reported on separately in order for charities to remain compliant and also have a clear understanding of where funds can be spent.
Value of scenario planning and forecasting
As we’ve mentioned, creating a budget that supports your strategy means going beyond the question “are we on budget.” Instead, the focus is on having regular conversations around:
- What has changed?
- What might happen next?
- What does this mean for cash and reserves?
- What decisions do you as a trustee need to make?
- What action needs to be taken based on the up-to-date financial information you have?
It is these conversations by trustees around scenario planning for sustainability, where it is not about predicting the future perfectly, but rather giving charity leaders and trustees better choices before financial pressures become a crisis.
Scenario planning and forecasting in this sense, for charities, should therefore look like:
- Aligning daily financial decisions with long-term vision and plan.
- Having a clear picture of where income is coming from to support strategic plans, i.e., fundraising, grants, reserves, etc.
- Built-in contingencies, planning for scenarios, and risks.
- Taking into account core overheads, identifying clearly direct and indirect costs.
- Optimising resources, better aligning resource allocation with strategic goals.
- 13-week cash flow forecasts that act as an early warning tool.
- Scenario dashboards to help trustees focus on the decisions that matter.
- Using designated funds strategically without losing sight of free reserves.
- Team involvement: involve those on the shop floor, your charity manager, and all board members, not just the finance person.
Budgeting beyond the numbers
Having a clear strategy is important for charities to understand where they are heading and what their future looks like.
However, having a charity budget that supports this strategy is essential.
Essential in supporting long-term sustainability and better and more confident decision-making, even when faced with challenges and risk.
To find out more about scenario planning and what this involves, check out our practical checklist for trustees and finance leaders here.
