Researching your budget

Exactly what are you budgeting for? If it is an event or service, identify clearly its parameters. This can be quite tricky if you are sharing personnel and resources with another event running at the same time.

1. What sources of funding are there?
2. Who provides working capital?
3. Who underwrites in case of loss?
4. Get the participation of others for:
1. identifying particulars of costs and income
2. estimating costs and income where particulars are unknown
3. reviewing cash-flow cycle
4. identifying fixed and sliding costs
5. identifying and calculating financial risks. (Write them into the budget.)
6. reviewing drafts

Income patterns

Research the income patterns in your organization

1. Which activities generate income?
2. Which activities don't generate income?
3. Are there bad debts or slow payers?
4. Which kinds of income will decrease? Which will increase? (cf. product life-cycle, project life-cycle)
5. Are there indirect funding items that should be put in the bookkeeping?
6. What assets do you have?

Get hard figures of your projected income and cash-flow

1. Identify and itemize the known minimum ("at least") amounts that will come in. That figure should be fairly hard. Ignore the possible and probable income items; they aren't hard.
2. Identify and itemize expenditure. Cover all the expenses you can be sure of, and express them as hard figures. Round figures upward and don't forget to add any price rises for inflation.

Identify your risk

Does your hard total of income cover the minimum you know it will cost to keep running? That is, which one is higher, the "at least" income amount (1) or the total known expenditures (2)?

If the expenditures are higher, the difference between the two totals is a risk. It may be a reasonable risk if there is a good probability of other income, but the board needs to know that it is not yet covered.

Then identify your income targets and itemize them. Do they reasonably cover the risk amount?

Restructuring

If your income total doesn't cover the minimum costs, you might need to restructure your system.

You could cover the risk by reducing some of your minimum cost. Move it to a variable costs area (e.g. commissioned salespersons) where they can go up and down with variable income.

Here's how to separate fixed from variable income streams.

• In this context, "fixed" means that you know how much is coming in.
• "Variable " is income that can be paid for by commission. (It's called variable in this context because it isn't a fixed amount; it can vary greatly depending on the success of the work.)

Your costs are then tied to income streams, reducing or even eliminating risk.

Research expenditure patterns

Thoroughly research the estimated costs. In anything but a small organizations with simple finances, you will need to establish systems to gather all the data you will need.

If the chain of production processes is complex, you might need a system of throughput accounting to find out costs and profits for each stage.

You will probably use your organization's existing documents where possible, but you may need check them. You might also need to interview people.

1. Which activities create expenditure?
2. Which activities don't create expenditure?
3. Does expenditure follow an annual cycle? How does it differ from income cycles?
4. Which kinds of expenditure will decrease? Which will increase? (cf. product life-cycle)
5. Do you have cash reserves?
6. Make sure you include contingencies.
7. Are there expenditures that produce non-financial benefits? (E.g. strategic market placement, acquiring experience in a new area, etc.)

In a major project or event, defining and managing costs is a lot more complex. First, you must identify your costs and put them in your budget. This includes estimating hours and expenses, and compare your budget to previous similar projects.

Do any of the following that apply to your business:

• manufacturing and general overhead costs
• consumables records
• inventory, materials and finished product records
• records of purchases and associated costs
• all supplies
• sales information
• labor utilization records
• materials used
• payroll records
• service charge out rates
• fringe benefits

You will need to estimate costs to a level of accuracy considering:

1. the stage of the project life cycle
2. the availability of information at the time
3. contingencies to allow for identified risks and uncertainty
4. organizational requirements, for example overhead and profit margin

Get the data and write it down. Then systematically code it, classify it, and check it for accuracy and reliability.

Assign costs

Assign costs to specified products, services and organizational units. For example, consider any of the following costs that apply to your organization:

• direct and indirect costs
• fixed, semi-variable, and variable costs
• labour, materials and overheads
• manufacturing costs
• service costs

Reconcile data to ensure that your calculations are accurate.

An example: Training costs

Determining how much it costs to provide a course can be quite complex if you have to count hours and some other various costs. While not all costs below are financial outlays, they are still costs and you must pay for them in the long run.

1. Fixed costs of recruiting students: advertising, literature
2. Variable costs of recruiting students: responding to enquiries, interviewing applicants, administration on applications.
3. How many days of to revise the textbook and assessment materials each year. (Fixed.)
4. How many days of Professional Development each year
5. How many hours of class time
6. Assessing paper tests and assignments
7. Onsite assessment visit (including time on-site, costs of transport, and traveling time)
8. Moderation/validation
9. Reproduction of paper materials (e.g. photocopying)
10. Raw materials (e.g. wood for a carpentry course)
11. Administration: administrator time for processing records, stationery, postage, graduations, student prizes, dealing with registration and industry bodies, financial bookkeeping, admin office space, management costs.
12. Depreciation on equipment and libraries.
13. General operating surplus, which also covers general risks.
14. Refreshments and beverages if you provide them.