Irrespective of type and scope of your project, it requires a good budget. They are a compulsory component of successful project implementation. Thus, budgets and budgeting requires careful attention in planning and execution. However, it appears to be troublesome for many project managers. So, this article is for you if your job requires you to prepare budgets from time to time. Maybe, the budgets you need to prepare are for non-work related activities. I guess it is safe to say that our perspectives of budgets and budgeting are drawn from development sector project development. To help you understand budgets, it is important to know the sources of donor funding.
At the end of this article, you should be able to understand and explain what budgets and budgeting entails. You will also have a good knowledge of what cost to budget for; what costs are eligible or ineligible. You will also be able to compare income and expense budgets, as well as, direct and indirect costs. I will also discuss budget breakdowns and why you should never omit them in any budget. Ultimately, you should be able to prepare budgets for your project with ease. Let’s begin!
Budgets are important project documents which clearly show all the cost implications of achieving all the objectives of a project. It must account for all activities, tasks or actions that contribute to the success of the project. It is a mirror image of the proposal and must reflect all the provisions made in the project proposal.
This is the most important aspect of every proposal. As a matter of fact, a budget is a summary of the proposal in numbers. Budgets are often financial implications of a project and should always be submitted as a separate document with the proposal. A template for the budget may be provided. Where there are no standard templates, the project team should create one using MS Excel.
In budgeting, remember that there are often more people in need of money to develop projects than available funds. Care must be taken to give the best quality of results at the least possible costs. Do I need to say that any organization that can give quality, similar or better results at a less price than other organizations that are seeking the same funds will get the money? I am sure you figured it out already. It is important that budgets are clear and easily understood.
In budgeting there are certain costs that are considered eligible and other that are ineligible. This means that some organizations will not fund certain kinds of activities. This is another area where some research has to be done carefully. The information on what a donor will fund can be found in our article on what donors really want. If the project includes some ineligible costs, they may be disqualified based on that error. An Irish donor agency; Misean Cara funds missionary organizations with links to Ireland. Despite their support for religious organizations, they do not necessarily fund religious projects such as building churches. It is important to study each donor and what they consider eligible and ineligible expense. Note also that donors often study a budget even before the main proposal is read. The reason for this is because a good budget can win funds.
The budget is composed of two main parts: income and expenses.
Income refers to monies available for project implementation and their various sources. It is best practice to have funding from many different sources and not rely for all project funds from a particular donor. Income can come from the following sources:
- grants or contributions from one or more donor agencies,
- earned income,
- fees for services,
- sales of goods.
A further breakdown of the various sources of income can be found in below.
Expenses refer to monies to be spent during project implementation and the specific items they will be spent on. There are two major types of expenses in project implementation including direct and indirect costs. Direct costs pay for the cost of implementing project activities while indirect costs cover the cost of running the project office at the time of implementing projects. Ideally, the cost of running the office is enormous and each project should only contribute certain percentages. This varies from donor agency to donor agency.
Direct costs cater for the implementation of the project activities and include personnel and non-personnel costs.
- Personnel costs refer to remunerations (salaries and fringe benefits). This is often worked out based on the amount of time each person contributes to the project measured in percentages. The purpose of measuring a person’s work time in percentages is to ascertain how much each staff should be paid by the particular project. For instance, the project officer who gives 50% of her time to project ABC, will earn only 50% of her salary from the project.
- Non-Personnel Costs refer to the direct cost of all project activities. Every activity and indeed everything described in a proposal should also reflect in the budget. Costs can be determined by researching up to three estimates from various sources. These estimates should be collected and documented. Estimates that are complete, reasonable and most realistic are chosen and the budget is built based on this. Project managers must desist from quoting costs that are either unverifiable or unrealistic. Donors are in the habit of verifying costs described in a budget.
These are also known as overhead costs, administrative costs, operating costs or supportive services. They refer to the cost of running the project implementing organization. Some examples of indirect costs include office rent, audits and bank charges. Others are vehicle maintenance, insurance services, cost of utilities, office equipment and consumables as well as other logistics. Indirect costs are a big deal in budgeting because they can bloat the total budget value and make the cost of a project higher than it should be. This set of costs do not contribute to the desired project results and as such must never be a large amount. Indirect Costs are necessary because they help the organization stay afloat. Consequently, many funding organizations will allow some funds, often a limited percentage less than 10%.
The budget outline (template)
The budget has to be itemized as clearly as possible and presented in the required format. It should be in line with the activities set in the main project document. If a template has not been provided, the project manager can create one which should provide a clear breakdown of all expenses including:
- Item Description
- Unit cost (price for each item)
- Quantity (Number that will be engaged or procured)
- Cost (Quantity X Unit Cost)
- Remarks (Explain / comment briefly on some issues required for fuller understanding of each of the budget line)
- Sub Total (Sum – up all cost under a specific cluster to be captured under the sub total)
- Total (Sum – up all sub totals)
- Grand Total (Sum all totals)
Final notes on budgets
It will be an additional advantage to state contributions from other sources such as the community or other donors. Contribution made by the proposing organization should also be stated in the income section. It there is any recurring income from the project activities, it needs to be clearly given in the budget section. Most donors may not give up to 100 per cent of required costs. They may prefer that the project team makes a counterpart contribution of between 5 per cent and 50 per cent of total project cost.
An important point to note is that more money should be committed towards key project activities. For instance; human resources and indirect costs shouldn’t take up more than 30% of the budget especially if a budget template has not been provided.
Michael is a Project Manager with years of experience in nonprofits and managing startups. He shares what he has learnt over time with like-minded persons. He gives classes to persons who plan a future in the nonprofits sector or as entrepreneurs.