103 Working in the voluntary sector

There are a number of ways in which an organisation may prepare a budget for the coming period. You may not know the technical term for your department or organisation’s budget, but you might recognise it from one of these descriptions:

• Incremental budgets: Here, the next budget is based on the previous period’s budget. There are generally few adjustments: perhaps an increase to allow for inflation, but sometimes there may be a reduction to encourage quality improvement and efficiency. It is simple, but it may reduce the process to an annual ritual without questioning the assumptions or reflecting changes in the real world.
• Zero-based budgeting: At the start of each budget round, managers ‘go back to square one’ and start from a blank sheet of paper. This may be time consuming, but it does mean that managers are required to examine their operation and question what they do. It may not be appropriate to use this method for each period, but doing so once in a while can be valuable.
• Rolling budgets: This approach is intended to allow for changes in the external environment that may impact on a budget. Based on the idea that the time horizon for many managers is quite short, it breaks down the budget for the overall period (for example, 12 months) into shorter periods (for example, three months). At the end of each short period the budget is reviewed in the light of reality, so that variations from planned budgets can be noted and explained. This may help if there are seasonal effects in the work that organisations do.
• Flexible budgeting: Here a budget is altered (flexed) to reflect changes in the level of activity over the previous year. This makes it more adaptable and realistic than an incremental budget. In doing so, a more meaningful analysis can be carried out.