It’s really hard to achieve your goals if you don’t have a plan to work towards. Yet some not-for-profits don’t have a budget at all. With a budget, you can see when things start veering off track and make changes early, before a small problem becomes a much bigger one.

The useful conversations often happen while the budget is being prepared. Is the funding realistic? Can we afford the activities we have planned? What would we change if some of the income didn’t arrive?

Start before the new financial year

Start preparing the next year’s budget a couple of months before the current financial year ends, so you can spot any problems early. This gives management and the board time to consider the assumptions and agree on a plan.

If you wait until partway through the year and assume everything will be fine, you can lose several months when action could have been taken. Preparing the budget early gives you a clearer understanding of what you’re relying on.

Be clear about definite funding and hopeful funding

The funding environment is difficult. There are lots of organisations vying for the same funding, so you might be less successful than you have been previously or than you expect.

There are different ways to show unsecured funding in a budget.

• You could label it clearly, for example: Foundation North funding – unconfirmed – $100,000
• Another approach is to weight the amount according to your assessment of the likelihood of receiving it. A potential $100,000 grant assessed as 75% likely might be included at $75,000, with that assumption clearly stated.

Whichever approach you choose, it needs to be clear to the board. A weighted figure is a planning assumption, not a commitment from the funder. The actual outcome could still be the full amount, a smaller amount or nothing.

Alongside the budget, identify what would change if that funding didn’t eventuate. This might be a separate version of the budget or clearly identified expenditure that could be reduced, postponed or removed.

Treat new income streams with care

It’s easy to be optimistic about a new income source, but be cautious about relying on a significant contribution before you know how it will perform. A new event, service or fundraising activity may have potential, but there needs to be a reasonable basis for the estimate.

If the budget hinges on that revenue, we suggest erring on the side of caution. Consider what happens if it takes longer to establish, costs more to deliver or brings in less than expected. It’s better to budget conservatively and have things turn out better than planned than to depend on income that doesn’t arrive.

A healthy bank balance can hide a cash shortfall

A budget and a cashflow forecast answer different questions. The budget shows the expected income, expenditure and result. The cashflow forecast shows when money is expected to arrive and leave, and whether there will be enough in the bank along the way. This matters particularly for organisations with seasonal income.

We worked with an organisation that had significant funds in the bank, but those funds were due to be spent over the following months. There wasn’t enough further income expected to carry it through the rest of the year. A key event also produced less profit than it ordinarily would. Until the event results and the next budget were available, we couldn’t complete the longer-term forecast.

Once we could look further ahead, the position was serious. The organisation needed to consider major changes to its operations and whether it could continue. The bank balance on its own hadn’t shown the extent of the problem. The forecast allowed decisions to be made to keep the organisation running.

Make the core information easy to find

Your board may not have a lot of time to analyse the reports in detail. When the financial reports come with a CE report and appendices, there can be a lot to digest – especially for volunteers with already-busy lives.

A clear dashboard can provide an easy-to-read summary of the things that matter:

• Performance: Income and expenses against budget, significant variances and the forecast year-end result.
• Cash and funding: The next six months’ cashflow, funds available for general use, funding still to secure and reserves against any agreed minimum.
• Delivery and commitments: Whether key programmes are on track, overdue receivables and significant payments or funding expiries ahead.
• Reporting and compliance: Progress on the budget, annual accounts and audit, including anything holding them up.
• Decisions and actions: What needs the board’s attention, who is responsible and by when.

Not every organisation needs every measure. Choose the handful that best explain your organisation’s position, with brief commentary on anything unusual or needing action.

The detailed reports can sit underneath for anyone who needs to dig further. Make it easy to get the core information across: is the organisation financially stable, is it delivering what it promised, and what needs attention?

Explain what the variances mean

Management reports should highlight significant year-to-date variances to budget and explain which are just due to timing. For example, the budget may include an expense in October, but it actually happened in September. That doesn’t necessarily mean the organisation will spend more over the year.

Other differences won’t resolve themselves with time. An event may have earned less than expected, or ongoing costs may be higher than budgeted. The board needs to understand what caused the difference, what it means for the year-end position and whether action is needed. An underspend isn’t always good news either. It might mean a funded project is behind schedule, with costs still to come.

Re-forecast when expectations change

Halfway through the year is a good time to see what you thought might happen versus what has actually happened so far, and adjust accordingly. Use actual results to date and update expectations for the remaining months. Keep the approved budget as the original benchmark, with the re-forecast showing where you now expect to finish.

Also re-forecast if something significant happens, such as additional funding or an event performing worse than expected. You don’t need to wait until halfway through the year.

Cashflow should be considered with every management report. A surplus on paper doesn’t necessarily mean there will be enough money in the bank when bills and wages fall due. You need to know you can keep the lights on!

Build resilience over time

Preparing a budget can highlight just how reliant your organisation is on funding. If a particular grant doesn’t arrive, do you have investment income that could help pay the wages? Or income from business activities that could cover rent for the rest of the year? Or does almost every operating cost depend on the next successful funding application?

Your board should consider how your organisation can generate its own income to cover operating costs, rather than always relying on funding. That might mean building an investment reserve, developing business or service income to support operating costs, or setting aside unrestricted surpluses when circumstances allow.

Those options won’t suit every organisation, and investment and business income have their own risks. The aim is to build enough flexibility that a missed grant doesn’t immediately threaten the organisation’s ability to pay its bills and continue its work.

This is a longer-term conversation, but the budget is a useful place to start.

At The Accounting Hub, we help not-for-profits prepare budgets, cashflow forecasts and regular financial reports. Starting early gives management and the board more time to understand the position and decide what to do.