Budget negotiations between senior management and boards can often be a tricky business. Rick Bond has some tips for managers wanting their boards to approve their budgets.
The autumn season is traditionally a time when the minds of directors, managers and trustees turn towards next years budget. Trustees may not create the budget but they are responsible for approving it. They will be held to account for it by the outside world should it fail. Therefore, trustees need more than a set of figures that appear to balance nicely. They will need information that will reassure them that the budgets contents are realistic.
Understanding the boards responsibilities will help budget writers appreciate the type of information they need to provide. If trustees have that information they can make decisions in less time. It will give them greater confidence in their management team, which means less work in revisions and the retrospective gathering of evidence.
Obligations
Trustees are obliged to ensure that:
- The budget will enable the organisation to remain solvent
- There will always be sufficient funds available to meet debts as and when they fall due (this is the cash-flow forecast)
- The budget is sufficient to enable the organisation to achieve its stated objectives
- It is robust, with risks identified, mitigated, managed or prevented
- There is sufficient evidence to suggest that financial targets are achievable and can be measured as the year progresses
- Where possible, the charity is diversifying its income and not relying heavily on unsustainable sources such as repeated project grants
- The organisation can comply with its reserves policy (the Charity Commission provides advice on this on its website).
Reporting
So, when presenting the budget to the trustees, what sort of information should the report contain, other than the figures themselves? Budget reports should always:
- Provide clear links (the dreaded performance indicators) between budgets and non-financial targets to show that the budget contains sufficient resources to achieve these targets. An example would be spend-per-head indicators for bar takings being linked to the number of tickets sold to demonstrate the accuracy of income figures
- Show trends in comparison to previous years, explaining the justification for any significant changes
- Provide a cash-flow budget showing exactly when you expect to earn and spend money, so that you can see if, or when, you may need to arrange an overdraft facility, or what happens if you plan a major event at a particular time of year
- Use cost ratios showing year-on-year trends. These will highlight strengths and weaknesses, and accountants will provide a list of standard ratios. These can include the ratio between contributed and earned income trend which way is it heading and is that realistic?
- State how figures have been prepared. Are they based on quotations, performance indicators or simply an allowance for inflation?
- Identify risks. All venue managers know that shows can unaccountably fail to sell tickets. The trouble lies in knowing which ones. Do you reduce income estimates by an average percentage or set up a programme reserve to underwrite losses based on the previous years experience?
- Look at variances from previous years, or the difference between budgeted and actual amounts. Does the future budget take these into account, and err on the prudent side?
- Note any new developments, e.g. new programme formats, and the basis for their inclusion and financial justification
- Note areas where you budget for large amounts of infrequent and unpredictable income for example, sponsorship or donations
- Provide a sensitivity analysis: What happens if&? This will identify key areas of risk, allowing you to plan well in advance what to do if that if happens and you need to avoid a crisis.
Prudence
This may sound like a lot of work, but I have found that there is a clear link between arts organisations that provide such information for their boards, and those that meet their financial targets on a regular basis. Such organisations also tend to be more attractive to funders all of which means less time dealing with unplanned financial problems, and more time to invest in artform developments.
Rick Bond is the Director of The Complete Works (UK) Ltd, specialising in facilitating management insights, solutions and training for arts and cultural organisations.
t: 01598 710698.
e: rick@thecompleteworks.org.uk
w: http://www.thecompleteworks.org.uk
