Charities should move away from a traditional “last year plus inflation” budgeting approach due to the volatile nature of energy, pensions, pay pressures and compliance demands leading to “sharp and unpredictable cost shifts”, experts have warned.
The Charity Finance Group has published this week an updated version of its “Know Your Cost Base” guidance, which is designed to help charity finance professionals apply an accurate cost base across their organisation.
The guidance was first published in 2008 and has since been updated to match a “very different landscape”, the CFG said.
The updated version says charities can only maximise their impact with a clear strategic plan that covers three to five years and is flexible to changing circumstances.
“Such a strategy needs to be both operational and financial – operational in terms of delivering quality services, and financial in terms of delivering the services in the most cost-effective and efficient way possible,” it says.
“Charities need to be clear about what they can offer, what it is going to cost and why a charity should be selected rather than a commercial organisation.”
Charity budgets need to link directly to their strategic plans because budgets prepared in isolation have “less value or may not focus on making the best use of resources”, the guidance says.
Richard Sagar, head of policy at the CFG, said: “In recent years, many charities have experienced sharp and unpredictable cost shifts.
“Energy, pensions, pay pressures, compliance demands – none move in neat, predictable lines.
“In this environment, the old ‘last year plus inflation’ approach can lock organisations into assumptions that no longer reflect reality, creating significant delivery risk when funding fails to keep pace.”