3 What is a budget?
One common definition of a budget is a plan set out in monetary terms, for a given period (usually one year). People often use the term ‘forecasting’ in the same way as ‘budgeting’. There is, however, a key difference: a forecast predicts what may happen; a budget is a commitment to what will happen. Typically, departments within an organisation forecast their activity and, based on this, a budget is produced showing all items of revenues and expenses for a specified period (often one year). These are then translated into a master budget for the organisation.
Once agreement has been reached on what resources are to be allocated to the budget, the task of the managers (or other staff or volunteers) of the various areas is to meet their budget (and ideally come in ‘under budget’).
All organisations set budgets. Budgets are practical statements because the budget establishes and directs what activities and actions can happen within the organisation. The budget is an estimate of what the organisation needs; that is, it addresses questions such as:
- How much will salaries be for the year?
- What expenses might staff and volunteers need to claim?
- What equipment do you need to buy this year?
In this way an organisation can avoid nasty surprises later in the year.
Clearly, before a budget can be set, people need to discuss and agree what the expenditure is likely to be in relation to the aims of the organisation for the year ahead. An organisation’s financial staff will usually be involved in the finer details of the financial information, but ‘ownership’ of the budget should be perceived as wider and, in particular, not a ‘top-down’ approach.
Budgets contain mainly financial information and are usually expressed in monetary terms. However, a budget can also be thought of as a plan expressed in financial terms. Budgets help organisations to achieve their aims with the resources available to them. In theory, they enable managers (paid or unpaid) to make better decisions, and to monitor and control the part of the organisation for which they are responsible.
Budgets are usually internal documents, although, for example, if you were writing a bid for funding to an external organisation, you would usually include a budget as an estimate of proposed costs. Budgets include information about income and expenditure (you will see an example of a budget later).
Activity 2 Why are budgets important?
Imagine you have been asked to talk informally to new volunteers at an induction meeting at an organisation that you know. In the formal presentations, one of the senior managers mentioned the budget several times. Afterwards several of the volunteers ask you what she meant by it. Write some notes based on why it is important for an organisation to have budgets.
Do not worry if you found this a difficult activity – the purpose was to get you thinking about how budgeting is done in an organisation you know. You might have come up with some of the following issues or points:
- ensuring the organisation knows what money it has coming in and what it can spend
- setting objectives based on the money coming in
- thinking about the best time to plan activities or projects
- taking action as planned during the year
- monitoring feedback on what really happened
- controlling costs.