2.1 The basics of budgets

Having the skills to read and interpret a budget is useful in all walks of life but particularly in organisations. All organisations set budgets. A budget is a plan expressed in financial terms and it helps organisations to achieve their aims within the resources available to them. It is usually prepared on an annual basis and looks ahead to the following year. Sometimes there is a need to change things or move money around as the year goes on, and unforeseen circumstances arise or new funding comes in, but generally speaking budgets should be regarded as relatively fixed each year.

Most organisations will have a set of budgets by department, function or project as well as their organisational-level budget. Many people who are budget-holders are not necessarily financial experts. In some organisations, volunteers may also be budget-holders and trustees will also need to understand their organisation’s budgets in order to help with developing financial strategy and the overall direction of the organisation. For registered charities, trustees have a legal duty to look after their charity’s money and other assets. In some types of organisations, trustees can be personally liable for any debts. Understanding how to read and interpret budgets at a basic level will always be important and if you are planning to become a trustee you may wish to take your knowledge to a more advanced level.

Although all organisations set budgets, there are a few differences between voluntary and private sector organisations:

  • voluntary organisations do not talk about profit and loss but about surplus and deficit

  • registered charities produce a Statement of Financial Activity (SOFA) rather than a profit-and-loss statement

  • voluntary organisations usually produce an annual report which details all the funding coming into the organisation and going out (expenditure).

You will now look at the main elements of budgets namely income and expenditure.

What is in a budget?