Budgeting

Budgeting and Accounting Software

October 2020

We’ve had a few requests lately to help with setting up and maintaining a budget especially using the accounting software Xero. This often turns into a wider discussion about what should be budgeted for, and what the budget should show.

A budget is usually a ‘living document’, i.e. it gets adjusted through the year depending on the actuals. For example, if income is significantly below expectations, you can’t always wait until the end of the year to do something about it. Likewise, if funding is perhaps more than expected (or maybe there is an entirely new development not foreseen at the beginning of the year), then action should not have to wait until the next annual budget round.

While Xero does the job well, and some people use Xero very successfully for budgets, it is probably often easier and more effective to do this on a spreadsheet. This is partly because budgets tend to be on a higher level (for example you’ll have one budget line for ‘office overheads’, while your bookkeeping system might break it down in more detail), and accounting software is not good at adjusting for extraordinary items that may occur.

Another disadvantage of the Xero budgeting function is that it is on an accrual basis, whereas most organisations (including businesses) are better off doing budgets on a cash flow basis, i.e. showing the actual money flowing in and out. If you are working with grants and government funding especially, monthly accruals can seriously distort the picture, as the financial reports then do not show the actual money received. An accrual budget will also not alert you to periods in the year where cash might run low.

As with all software, the principle ‘garbage in – garbage out’ always applies. With a spreadsheet, at least, you will find it easier to spot the garbage.

 Budgeting: No accruals, please!

September 2021

Accountants tend to be very wedded to accrual accounting, as doing anything else doesn’t feel right to us. However, when it comes to day-to-day managing your money, especially as a not-for-profit, what matters is how much cash you have in the bank, and whether it is enough to fund your expenditure. Unlike a business, a not-for-profit does not have investors or other stakeholders who want to see profits, and therefore does not need to budget for one.

Doing a budget, even in a business situation, is best done on a cash basis. You want to know how much money will be paid by your organisation, and how much is coming in to fund it. You need to know if there is money to pay for purchasing new computers, or a much needed vehicle, not what the depreciation figure for such a purchase would be.

A budget starts out with figures for the whole year. Unless your organisation has enough reserves that it can be sure it will not run out of money no matter what, it is a good idea to break this annual figure down into months, and monitor. When breaking down into months, don’t just divide everything by 12, but make sure that the months reflect actual expectations. For example, if you expect a $12,000 grant from Lotteries to come in in September, you won’t enter $1,000 as income for each month, but enter the whole $12,000 for September.

What is particularly important is that for each month a closing cash balance is calculated, which becomes the opening cash balance of the next month. When doing this, you will be able to see at which times of the year you are likely to be low on money, and this figure needs to be compared with the actual figure in the bank.

Highly grant dependent organisations also need to keep an eye on money that is specifically tagged for specific purposes. This can be done by adding another line under the closing bank balance, which states the amount of specifically tagged funding (not generic operational grants), and an adjusted ‘closing’ balance, that shows not just if you have money in the bank, but also whether this money can be used to pay for what you need to pay.

 

If your closing bank figure is already much lower than expected a few months before the time you expect to hit the bottom, you may have to take action to save cost (or increase income) right away.

When a financial report is drawn up, maybe for a committee meeting, which compares the actual figure with the budget, it is important that this variance in bank balance is included in the report. Whether you make a surplus or deficit at the end of the year is a minor matter compared to the prospect of running out of money.