Financial Management

An organisation may make effective decisions, assure a safe and sustainable future, and uphold accountability and transparency towards donors and recipients by using optimized financial management systems. Planning, organizing, leading, and controlling financial activities are the main topics of the module. We cover every step of the financial management process, including funding acquisition, budgeting, monitoring, and reporting of funds.

Budgeting and Variance Analysis

Budgeting Basics

A budget is just a financial document that provides an overview of spending plan for a definite period
of time, normally, one year. This is focused on the primary goals and objectives as envisaged in the
strategic blueprint of the organisation or the direction the organisation wants to steer.

Components of Budgeting

Who are involved in preparing a budget?

What Information is needed to prepare a budget?

Points to consider before you embark on your annual budgeting process:

  • Are there any new or specific objectives (which may convert into financial objective) that is
    being envisaged for the next year?
  • Are there desirable new projects, program expansions, or changes in compensation or any
    capital procurement which needs to be provided for?
  • Are there large expenses for which we should be saving?
  • Should we consider revisiting how we use our funds?
  • Is our allocation of funds in line with our priorities?
  • Are there any strategies/ measures we can adopt for cost reduction and efficiencies?

Approaches to Budgeting

Incremental

Uses last year’s figures by increasing or reducing them to arrive at the current year budgets. Incremental budgeting is appropriate to use if the primary cost drivers do not change from year to year.

Activity Based

Top-down budgeting approach that determines the amount of inputs required to support the
targets or outputs set by the organisation. The organisation will need to first determine the activities
that need to be undertaken to meet the program goals, and then find out the costs of carrying out these activities.

Zero Based

A method of budgeting in which all expenses must be justified for each new period. The process of
zero-based budgeting starts from a “zero base,” and every function within an organization is
analysed for its needs and costs. This means that the budgets or the costs of the previous periods
are not considered in the budgeting process. Budgets are then built around what is needed for the
upcoming period, regardless of whether each budget is higher or lower than the previous one.

Flexible Budgeting

A flexible budget allows for changes and updates when assumptions used to devise the budget are
altered. Under a flexible budget, this is reflected, and results can be evaluated for the changed levels.

Phases of budgeting process

The following framework will help build budgets for operations and capital expenditure.

Operating Budget vs Capital Budget

The operating budget reflects the organization’s planned financial activities for a defined period.
Normally on year, showing the quantum of revenue it expects from various sources and the amount
it will spend on operations. It’s a key tool in effectively achieving the organization’s defined purpose
needs to be aligned to the organization’s mission and strategic plan. The operating budget is
developed around the primary goals and objectives of the organization. (E.g. Budget for Girl
education program or health care program in Pune etc)

The capital budget may be sub sets of the operating budget and will include projects closely linked to the operations. The capital budget normally comprises of expenditure related to one-time investing in resources that will provide long term benefits to the organisation,( E.g. Budget for primary heath care centre equipment, For class room software and online technology) Before actually creating the spread sheets with the numbers, it’s important to have a clear idea ‘of how the entire budgeting process will be undertaken and the programs and its objectives for which the budgeting needs to be developed. It is also very important to ensure that the right information is (both strategic and financial) is available to draw up an accurate and realistic budget.

Please refer to “Guide card for the Budgeting Process”

Variance Analysis

Variance analysis is a useful management tool to determine the quantitative difference between
actual behavior and budgeted plans and keep the programs on track.

Now that the budget has been drafted for a year, you need to measure how effectively were you able
to reach your revenue and expenditure targets. Performing variance analysis helps you identifies
initiatives, projects and departments which are exceeding their expenditure, or not matching their
revenue generation goals. Performing a month-by-month variance analysis helps you identifies
problem areas, and move quickly to resolve them

Where is Variance Analysis Applied?

  • Comparing Budgeting and Actuals

a. Previous year Actual results with current year budgets

This will allow the organisation to plan the current year budgets after analysing and identifying areas
that require more attention. This is done before the current year budgeting process commences.

b. Revenue and Expenditure Figures
As detailed above, the primary application of variance analysis is to compare the variance in
budgeted and actual revenue and expenditure figures for a given month, quarter or year —
depending on the timelines for the project, or how frequently you wish to analyse targets. Choosing
frequent targets will make you more agile, but puts greater stress on your finance team

c. Previous year actuals and current year actuals

This will give a reasonably clear picture of the growth of the organisation and the areas of focus in
the current year. This is normally done at the end of the year.

  • Identifying Correlations

Variance analysis could also help you identify relationships between certain aspects of your
organization. For example, you may notice that the increase in spending on marketing is not
providing the corresponding increase in donor contributions from a particular industry. You can
therefore revisit your marketing strategy to account for this particular industry. Be careful not to fall
into the correlation-causation trap. Correlation does not imply causation

  • Forecasting

Forecasting is an activity wherein the historical trends and patterns are used to create forecasts for
future budgets. Learnings from previous years like seasonal trends will help you forecast them in
subsequent budgets. Variance analysis will set the right context in identifying factors that is likely to
affect the forecasting

Budget variances

When actual results are better than the expected results, the resulting variance is described as a
favourable variance and is denoted by the letter F or + ve variance. When actual results are not as
per the expected results, the variance is described as an Adverse Variance denoted as A or -ve variance

The budget variances should be escalated to the Trustees/Board of the organisation once it has been investigated upon with the details of the cause and identification of appropriate action to be taken to rectify the situation. Not all positive variance indicates a favourable situation for e.g., the positive variance in fundraising costs means that the amount was not spent or that the possible fundraising activity wasn’t completed by the organisation as such, Income from fundraising could be below expectations or this same period.

Useful Links

https://www.accountingtools.com/articles/what-is-variance-analysis.html

https://www.councilofnonprofits.org/tools-resources/budgeting-nonprofits

https://studylib.net/doc/5838535/budgeting-and-variance-analysis-for-charities

https://www.wallstreetprep.com/knowledge/budget-actual-variance-analysis-fpa











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