2c.1 Budgeting Overview
Every project must be guided by a budget. A budget is a plan for how much money will be received and expended within a given timeframe and, based on careful analysis, how management expects these financial flows to be distributed across the different parts of the entity’s operations.
Budgeting is a federal requirement as part of implementing the uniform cost principles articulated in 2 CFR Part 200. [See Section 3.a] Ultimately, budgets outline anticipated funding from all sources and establish boundaries for all expenditures. Once those boundaries have been established for a given timeframe, grantees must operate within them.
Based on the funds available and the programmatic objectives we hope to achieve, we develop budgets for our organization, each program and each project. Each of these budgets has details on specific items or categories of items. In this way, budgets help promote accountability at all levels.
2c.2 The Budgeting Process
The budgeting process includes planning for both revenue and expenditures at the project and program levels. Budgeting helps to assure that funds will be available when needed and also provides an ongoing check for reasonableness through comparing actual revenues received and expenditures requested against the plan. Thus budgets are core components of applications, written agreements and reports.
Management staff is responsible for developing the budget, but governing bodies, such as city councils or nonprofit Boards of Directors, are required to review and approve each budget. When presenting for review and approval, it is important to:
- Connect the budget to organizational objectives and explain how the budget supports implementation of the annual action plan or the strategic plan.
- Compare the proposed budget to the prior year’s actual revenues and expenses, and account for variances.
- Explain impact on cash levels and provide recommendations for maintaining a stable financial environment.
2c.3 Budget Controls
Once a budget is approved, it becomes the guide for all expenditures. Budget management and control is the ongoing process of comparing actual results with budgeted amounts in order to monitor adherence to the planned budget, identify and understand variances, and proactively plan for necessary revisions.
Budget controls are procedures for comparing actual revenues and expenditures with the approved budget, and for understanding and addressing differences or variances between them. This is an ongoing process throughout the budget cycle, and during the accounts payable process every time a payment request is prepared. All payment requests should be compared to the approved budget to ensure that expenses are eligible, planned, and can be covered with existing cash resources.
The basic elements of budget controls include:
- Comparing expenditures-to-date against planned expenditures and against projected accomplishments for such outlays
- Reporting deviations from budget and program plans
- Requesting approval for budget and program plan revisions
Grantees’ requests for payment will not be processed unless two conditions are met: first, there must be budget authority for the intended expense type, and second, there must be sufficient funds remaining in the line item budget to cover all current and projected expenditures and encumbrances. Understanding this reality is essential to understanding the importance of careful, realistic budgeting. We recommend that prior to spending, or authorizing anyone else to spend grant funds, grantees routinely compare year-to-date and projected expenses to the authorized budget amounts for each line item and confirm that the projected annual total will fall within the boundaries of that line item.