How Do I Prepare a Charity Budget for the Next Year

Introduction

Every charity, no matter its size, needs a realistic and well-structured budget. A budget provides a financial roadmap for the coming year, showing how much income the charity expects to receive and how that money will be spent.

A clear budget helps trustees and managers stay accountable, plan activities with confidence, and ensure that funds are used only for charitable purposes. Preparing it carefully also supports funding applications and reassures donors that resources are being managed responsibly.

What is a charity budget

A charity budget is a financial plan that estimates income and expenses over a set period, usually one year. It helps you understand what money is coming in, what will be spent, and whether the charity can afford its planned activities.

Budgets also allow charities to monitor performance throughout the year and make adjustments when circumstances change. In essence, your budget turns your charity’s plans into numbers.

Step 1: Review the current year’s performance

Before you plan for the next year, assess how your charity has performed this year. Look at your accounts and ask:

Did income meet expectations?

Were there any unexpected costs?

Which activities were most expensive or profitable?

Are any financial commitments continuing into next year?

Identifying trends and lessons from the current year helps you build a more accurate forecast for the next.

Step 2: Define your goals and activities for the year ahead

Your budget should reflect your charity’s objectives. Start by listing what you plan to achieve next year. This may include:

Expanding an existing project

Launching a new initiative

Hiring staff or recruiting volunteers

Investing in new equipment or facilities

Each goal will have associated costs. Work with your trustees or management team to prioritise what is achievable within your financial limits.

Step 3: Forecast your income

Next, estimate how much income your charity expects to receive during the year. Common income sources include:

Donations and fundraising events

Grant funding from trusts, foundations, or local authorities

Membership subscriptions

Trading activities such as charity shops or ticketed events

Investment or interest income

Be realistic about what you can secure. Review past income figures, confirm any guaranteed grants, and note which funding is uncertain. It’s safer to underestimate income slightly rather than overestimate it.

If your charity depends heavily on one funding source, consider diversifying income streams to reduce risk.

Step 4: Estimate your expenditure

Once you’ve forecasted income, list all the costs your charity will face. These are usually divided into two main categories:

1. Direct costs: These are linked to specific charitable activities, such as project materials, event costs, or volunteer expenses.

2. Overheads: These include running costs like rent, insurance, utilities, software, and salaries.

Don’t forget to include:

Payroll taxes and pension contributions if you employ staff.

Maintenance and repairs for property or vehicles.

Professional fees for accountants or auditors.

Marketing, communications, and website costs.

For accuracy, base your figures on past records, supplier quotes, or written estimates.

Step 5: Allocate restricted and unrestricted funds

Charities often hold both restricted and unrestricted funds. Restricted funds must be used for specific purposes defined by donors or funders, while unrestricted funds can be used for general operations.

When building your budget, separate these categories to ensure compliance. Make sure restricted income is allocated only to the relevant project costs. This helps trustees and auditors track spending correctly.

Step 6: Include contingency planning

Unforeseen costs can occur at any time, so it’s sensible to include a contingency amount in your budget. Many charities set aside around 5 10 percent of expected expenditure as a safety buffer.

A contingency fund can cover emergencies, such as equipment failure or a sudden drop in donations. Having one in place reduces stress and protects your charity’s operations.

Step 7: Check for a surplus or deficit

Once you have total income and total expenditure, calculate whether your charity will have a surplus (more income than spending) or a deficit (spending more than income).

If your budget shows a deficit, review your plans carefully. Can you reduce costs, postpone a project, or find new funding? Trustees must ensure the charity remains financially viable and does not spend more than it can afford.

If your budget shows a surplus, decide how to use it wisely. You might save it for future projects, build up reserves, or invest in capacity building.

Step 8: Involve trustees and key staff

Budgeting is a team effort. Involve trustees, senior staff, and project managers in reviewing the figures. Trustees have a legal duty to ensure the charity’s finances are properly managed, so they must approve the final budget before the new financial year begins.

Discuss assumptions, risks, and funding gaps so that everyone understands the plan and is confident it reflects reality.

Step 9: Present and approve the budget

Once finalised, present your budget clearly to the board of trustees. Provide a written summary showing:

Expected income sources and amounts

Main categories of expenditure

Key projects or objectives for the year

Any anticipated surplus or deficit

Trustees should formally approve the budget and record this decision in the meeting minutes. This demonstrates good governance and accountability.

Step 10: Monitor and adjust throughout the year

A budget is not a fixed document. Review your finances regularly—monthly or quarterly—to check actual performance against your projections.

If income falls short or costs increase, adjust your plans early. Similarly, if you receive unexpected funding, decide how best to use it in line with your charitable objectives.

Keeping track throughout the year ensures the charity stays on course and avoids financial difficulties.

Tips for effective charity budgeting

Use accounting software or spreadsheets to track figures accurately.

Keep budgets simple and easy to understand.

Base estimates on evidence, not assumptions.

Review funding agreements to confirm restrictions and deadlines.

Align the budget with your charity’s strategic plan.

Common mistakes to avoid

Overestimating income or relying on unconfirmed grants.

Forgetting to include overheads or one-off costs.

Mixing restricted and unrestricted funds.

Failing to monitor progress or update the budget during the year.

Ignoring trustee involvement in budget approval.

Avoiding these pitfalls ensures your charity remains financially stable and transparent.

Conclusion

Preparing a charity budget for the next year is about turning your goals into a practical financial plan. By reviewing the current year’s results, forecasting income and expenditure carefully, and involving trustees in decision-making, you can create a realistic budget that supports your mission.

A strong budget not only helps your charity plan for the future but also builds trust with funders, donors, and beneficiaries. With clear financial management and regular review, your charity will be ready to deliver impact and stay sustainable throughout the year ahead.