Budgeting refers to the practice of estimating the expenses and revenues for every programme. The programme manager together with the executive management needs to ensure that enough resources are available and that donations and revenue generating activities take place in order to finance the programme.
All revenue generating activities will need to be priced. Therefore, the management needs to calculate the minimum price it needs to charge per product or service in order to operate the programmes and the institution on a sustainable basis.
From the list of inputs/needed resources in the programme plan the management will establish the programme budget. The budget is a summary of expected expenses and revenues. How to establish an overall yearly budget is described in the “Financial Planning” chapter.
The programme budget will include only those expenses that are directly linked to the execution of the programme activities. For example, staff remuneration, translation work, printing of materials, telephone surveys, travel cost, rent for venues, catering services, etc.
Fixed costs or general expenses that become due for the whole institution even if no activity takes place are planned for in the overall budget.
On the income or revenue side the programme management will need to list all sources of income that are directly linked to the programme. These can be special programme subsidies or public funds, member contributions to the programme, sale of products or materials and the revenue generated by clients paying for the activities in the programme, like training events, consultations or conferences. In order to estimate the expected revenue you will also have to know the prices you will charge for your services and products. The “Pricing” chapter explains how you calculate prices that cover the programme expenses, fixed costs and any profit or development margin.
In total, the programme budget will show a surplus of either revenue or expenses. The latter case is very critical. In general, programmes that cannot generate enough revenue to cover the expenses should not be realised. There are exceptions where the programme may be done, e.g., if the institution receives sufficient baseline funding from donors or if other programmes produce enough positive surplus so that a part can be used to cover for the budgetary gap. The financing of a programme by another activity makes only sense if the programme is just starting off and is expected to become self-sustainable in the future.
Note that from the positive surplus of all programmes the overall fixed costs or general expenses need to be settled!
The pricing of your products and services can be derived from the budget figures. You will list all programme expenses and deduct any donations and member support for the programme. The remaining sum will need to be covered by the prices charged for products and services sold in the programme.
Furthermore you will have to charge a supplementary sum in order to cover fixed costs and profit margin or development contribution. These supplements are mostly expressed in percentage of the programme expenses, e.g., fixed cost contribution of 10 % of programme expenses.
How to know which percentage to use? From your overall yearly budget you should separate fixed institutional cost from programme related expenses. Express the fixed cost (minus any baseline funding) in percentage of the programme related cost and you will see how much you have to earn additionally per programme to cover the fixed cost. This analysis is also called break-even analysis. It expresses how many people have to pay for your programmes a given price or how much you need to charge a given number of people in order to cover all fixed and variable cost.
Example: Your total programme related expenses are estimated at US$ 87,000. Your institutional fixed cost will mount up to US$ 15,000. You will receive a total of US$ 5000 in membership fees that are used to contribute to the coverage of fixed cost and a total baseline funding of US$ 2000 from the chamber of commerce. The remaining fixed costs that need to be covered by your programme earnings are US$ 8.000 (15000 – 5000 – 2000). The fixed cost thus constitutes 9.2 % of the total programme expenses. You will have to charge an extra 9.2 % for every programme in order to cover the total general expenses by the end of the year.
You will also see that the price calculation enters into the programme budget as the expected revenue gained from programme activities (price * quantity sold).
Use the attached programme budgeting and pricing template (incl. Break-Even-Analysis) ) in order to develop your programme budget, simulate prices/fees and their effects on surplus/deficit and break-even point.
The programme management will also have to think about the cash needs for the activities – of course in view of the cash-flow projections of all other programmes. Note, even if the programme produces enough surplus, you will have to check when the revenue will finally result in payments and whether you will have enough money to pay the bills and salaries when they fall due. Unfortunately, the preparation of most activities creates liabilities. The income however is often generated after the preparation phase. Where are the funds with which you will bridge this time gap between cash outflow and cash inflow?
Example:
Training course preparation: expenses for training the trainers, translating material, developing case studies, advertising and selling activities, paying in advance for venue rental, etc.
The training fees will be paid only shortly before the course starts. In the mean time the institution has to have cash reserves to pay for all the above expenses.