Essential Finance - Budgeting basics

A budget is a plan that reflects, in financial terms, an organisation’s proposed activities for the next year. Effective budgeting is one of the most powerful management tools available to us. Both the process and the implementation greatly help in planning, control, decision-making and motivation.

In the beginning

It is important to decide who is going to be involved in the budgeting process, what their roles and responsibilities will be, and who will be responsible for co-ordinating the process and making sure it runs smoothly. The whole process needs to be timetabled, showing people, responsibilities and deadlines. Allowance needs to be made for staff holidays and a period of time for the budget to be distributed, ideally before the next financial year begins. The timetable must be neither too slack nor impossible to meet, and one of the responsibilities of the co-ordinator is to ensure that the deadlines are met and to chivvy people along.

Typical Budgetary Assumptions

• levels of core and project funding
• audience numbers
• artists’ fees
• material costs
• inflation and price increases
• staff levels and pay rises
• changes in legal requirements
• national insurance, tax, etc.

Budgets are based on a range of assumptions (above). These budgeting assumptions need to be agreed in the beginning, communicated to all concerned and kept on file with all other budget documentation. By definition, a budget is a snapshot view of the future, a time frame that is impossible to gauge with 100% accuracy. So budgeting should be seen as an evolving process, which, when repeated the following year, can be reviewed, modified and improved.

What to budget for

Once the organisation decides what projects and activities it proposes to carry out it needs to consider what the expenditure headings will be, clearly distinguishing between capital and revenue costs. Capital costs will include items such as computers, printers, furniture and vehicles. Revenue costs are best itemised under appropriate headings. Examples of headings could be ‘artistic’ and ‘administrative’ costs; artists’ fees, performance fees and touring costs would fall under artistic costs, and administrative costs would include gross salaries, printing and stationery, depreciation, postage and telephone. A review of what has been spent in the current year, as well as what is planned for the year in question, will help ensure that all items are catered for. Budgeting for income should be done by income type using appropriate headings. Sample headings could be box office/ admission fees, grants (distinguishing between Arts Council and local authority grants, for example), fundraising events, workshops and hire charges.

How much should we budget for?

At the start of the budgeting process a ‘latest likely achievement’ (LLA) should be produced. This is a projection of the company’s financial position at the end of the current year and thus at the start of the year being budgeted. This projection will provide a guide to next year’s figures (along with the budgeting assumptions above), and where a new project or activity is being planned it will be important to obtain quotes on what the likely costs will be.

The initial budgets produced will be subject to review, change and modification. Effective and good communication channels are essential in order to avoid delays, de-motivation and frustration. The budget should also be subjected to a ‘what if’? scenario. For example, what to do if income drops by 10%. Can activities be scaled back? Is cancelling or postponing the project a possibility? Can timings be changed or projects broken up? Important in this process is an evaluation of the sensitivity of the budget and the degree of change in the assumptions that would jeopardise activities.

Approval and use

Once the final budget is approved it needs to be phased and distributed to budget holders. It is vital that actual income and expenditure are monitored and compared with the budget. Constant use and evaluation, comparing budgeted and actual figures, will maximise the value of a budget as an effective management tool.

Mahmood Reza is Proprietor of the accountancy practice Pro Active Accounting.
T: 0116 224 7122
E: info@paa.uk.com