How do I build a budget for a charity?

England and Wales: This page sets out the approach in full. Scotland: the same approach, with no difference — how you build a budget is a management practice, not a matter that varies by charity law. Northern Ireland: the same approach, with no difference, for the same reason.

How is a charity budget laid out?

A charity budget is laid out by fund first and by cost heading second. That is because a charity rarely has only one pot of money.

A budget is a management tool the trustees set for themselves: a plan of income and spending for the coming financial year. Budgets are built the same way in England and Wales, Scotland and Northern Ireland. The budget is not filed with the Charity Commission, OSCR or the Charity Commission for Northern Ireland.

This page assumes the chart of accounts carries fund codes and the year end is set. If not, build your chart of accounts and set your financial year end first. The budget inside a single grant application is a different document, covered in build the project budget.

A commercial budget sets total income against total spending, because there is only one pot of money. In a charity, money raised or given for a specific restricted fund cannot plug a gap anywhere else, however healthy the year looks in total. So a budget that does not split by fund can look comfortable overall. Meanwhile the money free for core running costs is heading for a deficit.

Build the budget in two layers:

1. One column per fund: the general unrestricted fund, and each restricted or designated fund the charity holds.
2. Within each fund’s column, the figures split by cost heading: staff, premises, programme costs, governance.

That way the trustees can see how much a fund needs, and also what it needs it for. The unrestricted column is the one to watch hardest. That fund has to cover anything a restricted grant will not. It covers everything from the audit fee to a bad debt to next year’s rent rise.

The budget itself is not a statutory document. That holds whichever basis of accounts the charity will prepare: receipts and payments, or accruals. Which one applies turns on the ceiling set out in Do I need accruals accounts, or can I use receipts and payments?. So the budget is built the same way, whatever basis the year-end accounts follow.

Income columns: confirmed, likely and hoped-for

Split income into three columns. Build the unrestricted position on the first two only:

• what is contracted or received
• what is a strong probability, based on a funder’s own indications
• what is a bid still waiting for a decision (how long decisions take is covered in track your applications and respond to funder questions)

A budget that lists every grant application as if it were already secured is not a budget. It is a wish list. Where a restricted grant funds a post or a project, the matching spending line has to be shown in the same fund. That fund’s own budget then nets close to zero, instead of looking like free money.

The share of overhead each restricted project should bear is a calculation of its own. Overhead here means support costs, governance costs and a share of the rent. Do not guess at it when drawing up the budget. See Calculate your full cost recovery rate, which covers full cost recovery in full.

Two costs the first-year budget usually misses

The two costs a first-year budget usually misses are the fee for external scrutiny and the cost of staff sickness. The first has usually never been budgeted for at all. It arrives after the year it relates to, not alongside it.

The charity may need an independent examination or a full audit. Either way, the invoice lands after the year end, for work on the year that has just closed. That is easy to forget when building next year’s budget, and costly to find out the first time.

Fees vary a great deal, and no professional body publishes a scale. But the ranges that do exist are useful. One published fee schedule quotes an independent examination, at the smallest income band, from around £360.

A sector fee survey puts the median cost of a statutory audit several times higher, at around £1,420. That holds even for a similarly small charity at the same band.

Both figures are a guide, not a price list. Neither has been updated recently. The gap between them is a reason to be sure which one the charity needs before the budget is set. See Determine your external scrutiny requirement.

The second is the cost of staff sickness. It changed shape, and most budgets have not caught up. Statutory sick pay is now payable from the first day of a qualifying absence, with no lower earnings limit.

A charity with several part-time or casual staff who previously fell below that limit sees the biggest change. Those staff moved from no entitlement to full entitlement. A budget built on the old assumption sets aside too little for this cost across the board, not just for one or two people.

Who approves a charity budget?

The trustees approve the budget at a board meeting and minute it. A budget they have not discussed and minuted is a spreadsheet, not a decision.

The board meeting that approves it is where the fund-by-fund split earns its keep. It is the moment to ask, out loud, what happens if the unrestricted column runs short. Ask too what the trustees are prepared to do about it, before the year starts rather than after.

Once the budget is minuted, the next step is to build a cashflow forecast from it, month by month.

Common mistake: budgeting total income against total expenditure without splitting by fund

It is how commercial budgets are built, and it balances neatly. But a charity can show a balanced budget overall and still be unable to pay its core costs. The surplus sits in restricted funds that cannot legally subsidise them.

Common mistake: not budgeting for the cost of external scrutiny

It is a yearly cost that arrives after the year it relates to. So it can slip through when the budget is built. Charities crossing a scrutiny threshold for the first time meet a cost they did not plan for.

Worked example

Saltmarsh Trust’s summer programme is funded by a restricted grant tied to a named worker’s post. The trust also has its ordinary unrestricted fundraising income. Consolidated, its draft budget for the coming year balances comfortably.

Split by fund, the restricted column is matched exactly by the grant and nets to nothing. Now set the trading subsidiary’s Gift Aid payment and general donations against core staff and premises costs. The unrestricted column is running a deficit.

The consolidated figure never showed the gap. Only the fund split did, and it showed it before the year started, not partway through.