Income and expenditure
Income is a list of all the money the organisation has coming in or has in the bank as reserves or surplus. If an organisation was not intending to spend the reserves they might not be mentioned, although the budget would usually refer to the expected interest to be earned for that year. In a very small organisation it may be easy to have a good idea of how the organisation is funded and where the money comes from, but in bigger organisations this may not be so apparent. It may be clear how individual projects are funded but not how the money for everything the organisation does is raised. One good way to find out is to look at the organisation’s annual report: it’s a requirement for registered charities to submit the report to the Charity Commission, and even organisations that are not registered usually produce an annual report for staff, volunteers and supporters. However, annual reports are primarily providing information about the previous year rather than the forthcoming year (although most organisations will look ahead too).
Charity reserves – the money that charities hold that has not been spent, committed or designed for a particular purpose– are a controversial issue. The media often criticises charities for holding large reserves whilst still doing fundraising appeals. Yet having reserves probably means that good financial management has been practised. Should the charity lose a key stream of income then they will have enough in the bank to cover the running costs until they can secure alternative income. This prevents their beneficiaries from being left without services that they may rely on. However, because of concerns about financial management in charities, the Charity Commission for England and Wales states that voluntary organisations should ‘explain and justify’ the level of reserves they hold. Therefore, registered charities need a reserves policy.
A budget aims to be a realistic view on how much money the organisation expects to have for the coming year. This can include grants from other organisations, membership fees, donations, trading activities, interest on reserves and so on. A budget is usually based on looking at previous years to get a sense of how much money came in. Therefore, it is important to have discussions amongst staff and with trustees in order to assess what is needed for the forthcoming year.
Income is usually a mix of unrestricted and restricted funding. Unrestricted funding includes income that can be spent at the discretion of the trustees. Restricted funding includes money given for a specific purpose within the wider objectives of the organisation. It might come from a funder or a public appeal. Restricted funding is becoming more commonplace as the amount of money available from government decreases. It involves a legally binding agreement through a contract, which sets out which services will be provided by the voluntary organisation and what it will be paid for those services. On the positive side, a contract creates a partnership between organisations and may provide a period of secure funding. On the negative side, voluntary organisations may feel these contracts mean a loss of independence and less choice or freedom in deciding which services to provide. This money must be isolated, that is, only used for the purposes for which it was given. The charity needs to have procedures in place for tracking the funding and what expenditure can be applied to it. Some voluntary organisations will also have endowment funds which the trustees are legally required to invest or to keep and use for the organisation’s purposes.
All this information about income needs to be set out clearly in annual reports and budgets.
Table 1 shows an example of predicted income for Oldtown Community Association. It is a registered charity, first set up in 1960, and aims to provide facilities for social welfare, recreation and leisure, maintaining and managing a community centre and hiring the hall for promotion of community activities. It is run by a general committee, which includes a representative from each of the affiliated groups, and an executive committee of volunteers. Membership is £2 per person with affiliated groups paying £10 per year. Their fundraising activities have been fairly successful over the years and the organisation has funding from a Big Lottery Fund grant, which is being used to modernise the community centre. They have applied for a further grant for resurfacing the car park but are still awaiting the decision on that.
|Membership and affiliations||£2 000|
|Hire of the hall||£20 000|
|Fundraising events||£4 000|
|BLF grant||£30 000|
|Grant application (unconfirmed)||£5 000|
What is the association’s total income?
What is the most important source of income?
Can you foresee any problems with these different sources?
The total income is: £56,300. The grant application is unconfirmed so cannot be included; if their application is successful it is earmarked for a specific project which could then go ahead.
The biggest source of income is the Big Lottery Fund grant. However, this is for a specific purpose and is restricted and a one-off amount. In the long term, the hire of the hall raises the most money. The organisation could consider raising their membership fees but given the nature of the organisation, this may not be successful.
In common with many voluntary organisations, funding is uncertain. Membership might fall, donations might fluctuate, fundraising not be as successful as previous years or organisations might not want to hire the hall. However, the modernisation of the hall should provide greater opportunities for more events and income from hiring the hall.
Expenditure involves everything you might have to pay for and could include salaries to staff, volunteers’ expenses, building and energy costs, office and cleaning supplies, computer and website maintenance, publicity and so on. It is important to be realistic about costs, so a new budget would require some research into what new items might cost or how much a building costs to heat per month or per quarter, and so on. Organisations need to be accountable for their expenditure and ensure that income is spent according to their values and purpose. They should also look for cost-effective choices.
Table 2 shows the forecast expenditure for Oldtown Community Association.
|Energy costs||£3 000|
|Marketing & fundraising events||£1 200|
|Printing & stationery||£150|
|New computer & printer||£500|
|New desks & chairs||£1 500|
|Building work||£32 000|
|Car park work||£5 000|
What is the total annual budget expenditure?
What is the single largest category of expenditure?
Compare Table 1 from Activity 1 with Table 2. Does the budget balance, that is, is the estimated income the same as the planned expenditure?
The total forecast expenditure is £46,050.
The building work is the highest cost for the financial year. Unforeseen problems mean that the building costs will be more than the grant, meaning that the shortfall will need to be found from elsewhere or they might choose to cut costs elsewhere. However, the committee would need to check the terms of their grant to ensure they are fulfilling them.
The total projected income is £56,300. All being well, they will spend £10,250 less than this which gives them a good contingency, enough to cover the extra projected building costs. The car park work will only go ahead if they get the grant, so that £5,000 is separate. It might be that the committee would review these figures and decide to do some other projects. They also need to keep an eye on their reserves, which inevitably will increase during this year.