The deeper purposes of a budget

“Failing to plan is planning to fail” – Alan Lakein

A budget may seem like a boring administrative task that “needs” to be done by the finance team to keep stakeholders like the board happy, but a good budget serves a much deeper purpose.

A good budget will help your organisation:

  1. Deliver its social impact
  2. Know if you’re on track
  3. Plan for success

Delivering social impact

Almost every activity has an associated cost. Programs, no matter what their intent, cost money. A budget will reflect the costs of delivering your services. Furthermore, by allocating costs to your services you will also be determining how many of your services and/or product offerings you can afford to provide in a given time period, usually a year.

Preparing a budget forces you to make decisions around which services and/or products you want to provide, and how many of each you can afford to provide over a given time period.

The preparation of a budget forces your organisation to make the best use of its available funds and consequently make decisions regarding which activities are most impactful and will best deliver your social objectives.

Know if you’re on track

Financials and numbers do not always tell the full story of an organisation, but they are always a great starting point.

If a budget is not being followed, or if actual financials are significantly different to the budget, this may be the starting point for a series of questions that dig deeper into budget variations.

If the organisation’s income is not coming in as expected, is it because of external factors such as government decisions or the economy, or is it because of internal factors within your control – such as the pricing of your services and/or products or a poor marketing strategy that is failing to reach your intended customers.

Equally, if expenses are less than expected, are programs (and their associated expenses) being delivered or is the organisation slow in its implementation? If expenses are higher than expected, are there internal control issues with key staff spending above and beyond what has been approved?

Financial variations are almost always the symptom and red flag to issue(s) that are occurring within the organisation, rather than the problem in itself. It is for this reason that the actuals should be compared to the budget on a monthly basis and communicated to the broader team.

Plan for success

A report by the Australian Institute of Company Directors made clear that profit is essential for long-term organisational sustainability.

If your organisation is making a loss you will need to draw on savings and reserves to cover those losses. Depending on the amount of money your organisation has put away, continual losses will eventually mean that you have to wind up your organisation. Losses should only be budgeted for in exceptional, one-off circumstances such as transitioning to a new market or the development of a new product.

At an absolute minimum, profit of one to three percent must be achieved to keep pace with inflation. After all, employees and suppliers will expect to have their pay increased at a minimum of inflation, and your EA or award rates could be higher.

Profit above inflation rates allows an organisation to add to its net assets. Strong net assets and cash reserves can significantly de-risk an organisation and improve its chances for long-term survival. Furthermore a strong and liquid balance sheet allows an organisation to invest in ongoing capital expenditure, such as IT upgrades and improvements, and respond to changing markets and client needs.

So although at first glance a budget may seem like a boring administrative task, a good budget serves much deeper purposes.