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.