Annual budget checklist

How to Use This Checklist

This is a starting point, not financial or legal advice. Adapt it to your organization, your funders and the law where you work, and use your own names for the budget year and for your governing body.

A budget process should typically start at least three months before the budget year ends, so the board or governing body can approve before the new year begins. A budget written by one person overnight before the first board meeting is almost certain to be inaccurate and useless for control.

Copy the list into a sheet, give each item an owner and a status, and work through it in order.

Before You Start: Timeline, Roles and Goals

• The timeline is set, with a target date for board approval.
• Roles are agreed: who has which role, who has authority to make decisions, and how much uncertainty the budget can carry.
• The budget's main purpose is decided first, such as funder compliance, tracking unsecured funds, testing a new cost structure, or managing scenarios.
• Program delivery goals, organizational financial goals, and the annual goals from the strategic plan are set.
• This year's income and expense are reviewed against budget, forecast to year end, and each variance is understood.
• Financial controls are reviewed. This should happen at least once a year and after a significant change in how the organization operates.

Income and Funding Assumptions

Separate what is secured from what is hoped for. When forecasting revenue, be cautious and assume less income.

• Known, steady income is calculated first: secured contracts, multi-year restricted grants, steady fees, and baseline contributions.
• Income from new activities is projected separately.
• Support schedules are built for the largest and riskiest amounts, such as release schedules for restricted funds and detailed fundraising plans.
• No major grant is budgeted where the chance of winning it is slim.
• Restricted funds are tracked in the budget, since gifts from grantmakers and major donors often must be spent as the donor intends.

Costs and Staffing

• Fixed and necessary costs are budgeted first, before items from a wish list.
• Known, steady expenses are calculated, such as rent increases, insurance premiums, and planned software purchases.
• The compensation structure and how staff time is deployed against organizational goals are reviewed, and staffing and pay priorities for the year are set.
• The cost of reaching the program goals, and the organizational and strategic goals, is worked out.
• If your funders or auditors need it, expenses are organized by function, for example administrative, fundraising and program costs, with each broken down further.

Indirect Costs and Overhead Allocation

Indirect costs, also called overhead, include items such as utilities, internet fees, and postage. Underfunding overhead can have disastrous effects on an organization.

• A cost allocation process is designed, if the organization needs one.
• A basis for sharing common costs across activities is chosen. One common way is by how much staff time is spent in each area, known as an FTE basis.
• You have decided whether to allocate administrative expenses across activities too, to show the full cost of each program area.
• The overhead each program carries has been compared with the allocation basis, to check it is not underfunded.

Draft, Review and Approval

• The budget is documented in one consolidated spreadsheet that is filed, with the support schedules.
• Risk areas in income and expense are discussed and a level of risk tolerance is agreed.
• The draft is checked against goals and adjusted so income and expenses match within capacity.
• All assumptions are written down.
• The budget is presented to the board or governing body for approval, focusing on decision points and the risks that need monitoring.

Cash Flow and Reserves

• A cash budget is built to show peaks and troughs in cash flow and to warn when reserves may need to be drawn on.
• You have worked out which part of your unrestricted funds is freely available to spend on any of the organization's purposes. In some systems this is called reserves.
• If you have a reserves policy, it is reviewed as part of planning at least once a year.
• Reliance on a single contract or grant for a large share of funding is weighed when deciding reserve levels.

Monitoring and Revision

• Management responsibilities are assigned and the approved budget is entered in the accounting system.
• The budget-to-actual reports are designed, with a set time for when they are distributed and a set way for feedback.
• Cash flow statements and budget-versus-actual reports are compared to the budget on a set schedule. One source suggests monthly or quarterly.
• A rolling projection is kept, updated as new information arrives, and focused on the areas of greatest risk or uncertainty.
• Written authority limits exist for placing orders and approving payments, and orders are kept within the agreed budget.
• Financial information given to budget holders explains any significant over- or underperformance against income and expenditure plans.
• You have agreed who decides what happens when a program costs more than planned. Management can cut costs or leadership can revise the plan.

Sign-Off

Once the board has approved the budget, file these items.

• The consolidated budget spreadsheet
• The written assumptions