Good Budgeting Supports Financial Sustainability
The three key steps to good budgeting
If you want to know about financial management for an organisation, you need to understand how it budgets. If you know what is happening in three key areas, the budget itself, the budget and actual comparison and the cash flow forecast, everything else falls into place:
1. The budget
This is the document approved by the management board which shows what is planned to be received and paid during the coming financial year.
Ask: does the total amount of income at least match the total expenditure? Are all the income figures realistic (that is will it really be received)? Are all the estimates accurate?
2. The budget and actual report (or ‘management accounts’)
This monthly report compares how much has actually come in and gone out with your estimate in the budget. Ask: is someone reviewing it regularly and taking action if things are more or less than what was planned? This is the key document for making sure your plans are being realised and, if not, to allow you to take action to make sure they will be.
3. The cash flow forecast
The main reason businesses/organisations fail is because they don’t consider their cash flow regularly enough. This forecast shows what will happen to your money and when it will come in and go out over the coming period. Ask: will there be enough money to pay your invoices for goods, services and salaries as they become due? The cash flow forecast shows you in advance when you might not have enough money, so you can do something about it.
Good budgeting supports financial sustainability and a strong programme of activities. With these three documents – the budget making sure you have enough money overall, the budget and actual report showing whether you are roughly in line with the budget plan, and the cash flow showing whether you have enough money to pay the bills – you are in great position to control your finances before they start controlling you.
More tips in John’s book: Building Financial Management Capacity, Published by Practical Action, 2014.