Budgeting

Preparing A Budget What budgets are used for All budgets itemize the costs that are expected to be incurred by a set of activities; most budgets also specify the income that is expected to cover these costs. A budget can be drawn up for a single activity, such as a training workshop, or for a whole program or organization. A program or organization should use the operating budgets of all its internal operating centers (such as a regional CBD program, a department, or a clinic) in developing its own operating budget. An operating budget is based on the year's work plan and on information about centralized costs. It itemizes the cost for one year of carrying out all activities and the expected income that they will pay for them. Just as the work plan is based on the long-term plans, the budget also relates to the financial plan and thus
reflects the financial aspects of the long-term plan. Why budgeting is important Budgeting is important because:

• The exercise of preparing a budget forces managers to think each activity through in detail and commit their thoughts to paper;
  
• Budgets give managers essential information on the projected expenses and income associated with planned activities; this information lets managers know whether all
  planned activities are financially feasible and whether more income needs to be raised or costs need to be reduced;
  
• When developed in accordance with work plans, budgets help managers to ensure that organizational resources are spent only on planned activities;
  
• The planner is forced to differentiate between essential and non-essential activities and to give essential activities a higher priority;
  
• By listing in detail the projected expenses and the expected funding sources, budgets help the organization to prepare to secure the resources needed to meet these
  expenses;
  
• Budgets allow managers to evaluate the actual costs of activities and thus to consider alternatives if the planned activities are too costly;
  
• By having a realistic, updated budget and comparing it with actual expenses, managers can be forewarned of potential shortfalls in the resources that are available for specific
  activities.
  

There are two basic steps to preparing a budget: identifying necessary resources and their costs, and determining their sources of funding. Assigning costs to resources The first step is to specify all the resources that are needed to implement the activities listed in the work plan and to assign a cost to these resources. To do this, look at each activity in the work plan and quantify the time, supplies, equipment, and other costs required to carry it out. For example, if a district work plan for ongoing community-based distribution of family planning services states
that supervisors will visit distributors every two months, then the manager who is preparing the budget has to understand what costs are incurred by this activity. Assuming that many of the distributors live in remote areas which are not accessible by public transportation, this
particular activity will probably involve such costs as: the salaries of the supervisors and drivers, fuel and maintenance expenses if vehicles are used on these visits, administrative costs such as office supplies and postage in the district office, and per diem and other travel expenses for distributors and supervisors. Variable and fixed costs Most of the costs of your activities will be variable costs.
These are costs that vary with the volume of service or scope of activities that you will provide. Some costs, however, will be "fixed." Fixed costs are incurred by the program no matter what the level of activity or volume of service is. Examples of fixed costs are rent and
utilities, equipment leases or payments, and most salaries. Both variable and fixed costs must be included in your budget. Determining where your resources will come from The second step in budget preparation is to determine where the resources you need will come from and which expenses will be paid for by which funding source. For many public programs, this step is simple because there is only one funding source, the government. But in private programs or in public programs that receive private money or charge fees to generate income, the task of
identifying ways to finance activities is more complex.

Factors to Take into Account during Budget Preparation

• Levels of spending (current level for ongoing projects, anticipated level for new projects)
  
• Expected changes in costs (estimated in percentages) for salaries, drugs, etc.
  
• Projected changes in project activities (new clinics, new activities, etc.)
  
• Other relevant factors that may change, for example the population you plan
  to serve, changes in fertility that you expect, etc.
  
• Contingencies (funds set aside for unexpected additional expenses
  

Tools and TechniquesTips for Budget Preparation When preparing a detailed budget, you will find it helpful to sort all anticipated expenditures and
revenues into the categories listed below. Included in the description
of each budget category are some helpful suggestions to
make the budgeting process easier and more accurate.
Fixed assets: <blockquote>
These are assets that have a useful life of longer than a year, such as
land, buildings, furniture, and large pieces of equipment. </blockquote> Revenues <blockquote>
Revenues from sales or fees are calculated by multiplying the
anticipated number of commodities to be sold (or services to be
provided) by the prices to be charged, and then deducting from the
total the value of commodities and services provided free of charge.
Revenues from grants should be based on the grant agreements and equal
the expenses to be made under the grants. The
projections of funds
from donations should be based on previous experience, unless
circumstances are expected to change significantly. </blockquote> Salaries and Wages <blockquote>
This category includes monies to be paid to staff. To estimate
personnel costs, it is useful to start by listing all staff positions,
the amount of salary or wages to be paid to staff in that position, and
the percentage of time that that position will be employed (100
percent, 50 percent, etc.). Private sector managers will almost always
include salary costs in their budgets. However, many public sector
managers will not budget for salaries since these costs are paid for by
a higher level in the ministry or by another ministry altogether. Even
if managers don't
budget salary costs, it is a good idea to list the
staff positions which are required to implement planned activities.
This will allow managers to respond appropriately to any increases or
decreases in staff due to changes in program activities. </blockquote> Fringe Benefits <blockquote>
This
category includes expenditures for benefits that are in accordance with
your organization's usual policy and practice. These should include all
benefits required by law, for example, social security, severance pay,
annual vacation, housing allowance, medical insurance, and others.
Calculate the benefits for all positions you listed under salaries and
wages. </blockquote> Fees <blockquote>
Examples
of specialized or infrequent activities for which fees are paid instead
of salaries include annual audits, design of information systems,
maintenance of accounting books (in small organizations), special
training for staff, design of educational materials, and surgical time.
Of all of these, only surgical time is a variable cost, which you
determine by calculating how long it takes to perform a
procedure
and related tasks, and how many users of surgical methods or IUDs you
have projected for the year. You may wish to pay surgeons and doctors
on the basis of how many hours they have worked rather than per
procedure, as the latter practice could serve as a financial incentive
to the provider to promote certain methods. </blockquote> Building Operating Costs <blockquote>
These
are fixed costs and can include minor repairs and renovation to the
buildings owned or rented by the program, as well as janitorial
services and the maintenance of building and grounds. Rent or mortgage
and utilities are often major fixed costs in large cities. </blockquote> Vehicle Operating Costs <blockquote>
These
variable expenses depend on the level of use of the program's vehicles
and the number of vehicles. Usually, the manager must calculate an
average charge for fuel, maintenance, and repairs per kilometer
traveled for those activities in the budget that require use of the
vehicles. Insurance costs sometimes vary depending on the age or
original value of the vehicle. </blockquote> Travel and Per Diem Expenses <blockquote>The
type of travel normally included in this category is the regular and
customary travel associated with the activities of the project, for
example supervisory travel, staff meetings, outreach, and field visits.
Some travel costs are variable and some are fixed. For example, the
supervisory travel costs are usually fixed because they are the same no
matter how high or low the average number of clients per distributor or
health post. The travel costs for home visits, however, are variable,
because they increase or decrease depending on your targets for numbers
of home visits. Refer to the job description for each staff person or
consultant and to the work plan. Project the number of trips, the
destinations,
and the duration of trips for each person. Include all estimated costs
for travel, such as air fare, bus/train fare, taxis, out-of-pocket
expenditures, fuel, mileage, per diem, etc. </blockquote> Depreciation <blockquote>This
is the charge representing the utilization of a fixed asset during the
period. Thus a vehicle with an estimated life of five years would
depreciate by 20 percent of its costs (minus resale value) each year.
Depreciation is probably only taken into account if the organization
expects to have to replace the fixed asset itself (as opposed to having
a donor replace it). </blockquote> Communications <blockquote>Postage,
couriers, telephone, and cables are usually treated as fixed costs,
because it is so hard to attribute increases in these costs to specific
programs or activities. One exception is large mass mailings, for which
you can calculate the cost per piece mailed. </blockquote> General Administrative and Maintenance Expenses <blockquote>These
fixed expenses represent costs incurred in running an office. They
include, but are not limited to: equipment rental, maintenance and
minor repairs to office and medical equipment, data processing, copying
and printing costs, office supplies, bookkeeping expenses, and
insurance. </blockquote> Educational and Publicity Contracts <blockquote>This
category is often a mixture of fixed and variable costs and includes
items such as the purchase, printing, or copying of pamphlets, books,
slide shows, and videos. Materials which service providers use
repeatedly in client education are fixed costs, while materials that
are given to each client or person educated are variable. Publicity
costs may vary according to the number of new clients the program wants
to attract; for example, in order to draw 2,500 clients, the program
may print 10,000 promotional brochures or purchase advertisements in
local
magazines. Publicity costs may also be fixed from year to year; an
example would be a standing fixed expense for radio spots on a local
show. </blockquote> Medical Supplies and Equipment These
are often variable costs, although large equipment depreciation is
usually a fixed cost. The supplies most often used in family planning
programs are medical supplies and equipment such as gloves, specula,
and contraceptives. The quantity that will be needed can be predicted
directly from the numbers of users and clients that you have projected
for the year during your planning process. The equipment to be included
in this category rather than under "Fixed Assets' consists of low-cost
items that are bought fairly frequently, which therefore count as
recurrent costs charged to the fiscal year in which they were
bought.
Surgical instruments and examination lamps are examples of equipment
that you might replace frequently, such as every three years.

Projecting Revenues And Monitoring Cash Flow Predicting cash flow is critical to program success Managers
must ensure that they have adequate cash in the bank (for private
sector programs) or funds in their allocation (for public sector
programs) to cover all anticipated financial obligations each month.
The first step in this management task is to project, during the
planning process, the cash flow and the funding availability. Once the
work plan and budget are completed, the manager uses both documents to
analyze the timing of anticipated expenditures. By comparing these with
the timing of anticipated receipts, the manager can see whether there are any periods in which there will be insufficient funds. For
example, if a new family planning clinic is scheduled to open in May,
there will probably be large outlays of cash for new equipment and
furniture in March or April. If the program receives equal quarterly or
monthly payments, there will not be enough cash for these unusually
high expenses in March and April, and unless the manager takes special
measure, the clinic won't open on time or will open without adequate
equipment. Strategies for anticipated cash shortages There
are three basic strategies for dealing with periods in which you
foresee insufficient funds. As a manager, you should find that at least
one of these strategies is feasible for your program.

• Adjust the timing of activities in the work plan, or cut other expenses from the budget;
  
• Rearrange a donor or ministry payment schedule so that large payments precede large expenditures;
  
• Arrange for a short-term loan (usually only possible for private sector managers).
  

Failure
to predict cash flow accurately can cause cash shortages at crucial
moments in the life of a program, leading to delays in the payment of
salaries (and thus demoralization of staff and high turnover),
inability to buy basic supplies when needed, and other emergencies, all
of which result in the program's failure to achieve its objectives.