Every NGO and every project needs to have a budget. A budget describes the money that an organisation plans to raise and spend for a set purpose over a given period of time.
"Failing to plan is planning to fail."
The budget plays an important role in every stage of NGO work: planning new work, raising funds, implementing activities, monitoring work and evaluation.
The programme cycle and the financial cycle go hand in hand.
How to prepare a budget (PLAN)
Writing a budget involves answering a number of questions, that can only be answered by programme staff and finance staff working together: They start with plans and goals, not numbers:
- What objectives are we trying to achieve?
- What activities will be involved in achieving these objectives?
- What resources will we need to carry out these activities?
- What will these resources cost?
- Where will the funds come from? What will the source be?
- Is the result realistic?
This might look like hard work, but we actually work through these questions every day, when we handle our own personal money. You can see a short illustrated example here: Rudi goes to the cinema.
A good format to start with is a detailed budget worksheet that can later be summarised or re-coded to match donor formats as needed. After the budget has been prepared it needs to be approved by the Board and / or donors.
See an example budget worksheet.
Implementing the budget (DO)
- The person with the responsibility for implementing a budget is called a ‘budget holder’, and is usually a programme or project manager, not a finance person.
- They use the budget to guide the implementation, checking BEFORE spending that items are budgeted for, and allocating expenditure to appropriate budget lines.
- Budget holders should focus on delivering the project objectives within the total budget rather than on spending all the cash outlined in the budget.
- Over or under spending within reasonable limits is not a problem as long as there are good explanations (but check your grant conditions, as some can be more restrictive than others).
Monitoring the budget (REVIEW)
Once the budget has been agreed and the activity implemented, the process is completed by comparing the plan (budget) with the eventual outcome (‘actual’), to see if there is anything we have learnt or could do differently next time. This is covered another section of the Guide.
See the section of the Guide on financial reporting.
What makes a good budget?
Budgets should be clear, so that other people can pick them up and understand them easily. Always add notes to explain any estimates or assumptions you make. You should use the same list of accounts codes in your budget that you use to keep your accounts.
See Top tips 3 for more advice on making effective budgets.
As well as a budget, NGOs normally need a cash flow forecast. This predicts when money will arrive in your bank account and when it will leave. It is very important to make sure that you always have enough cash available. For instance, even if a donor has agreed to make you a grant, you cannot pay salaries until the cash actually arrives.
See Top tips 6 for more on how to create a cash flow forecast.
See here for an example cash flow forecast
Mango's Financial Managment Essentials Handbook includes a whole chapter on budgeting and some sample formats.
Want to learn more?
Mango’s Budgeting Essentials training course is available as a 5-week eWorkshop.