In several organisations we have recently been debating whether the organisational budget should be changed in the course of the year or not. There are two main schools of thought.
The first group is strongly represented in the charity sector because of its governance structure. The annual budget is approved by the trustees and gives the management team the authority to implement the plans and spend in accordance with the budget. Any deviation from the budget should be reported and explained to the trustees. Proponents of "no change to budgets" claim that trustees are confused when budgets are changed because they cannot follow the trail of the changes; so they prefer a single budget for the year as a point of reference.
The second group proposes that the budget should be "flexed" when there are changes in the assumptions. For example, your organisation might have assumed at the time of budgeting that you would employ a certain number of staff, but after the budget was set the team was reorganised. This is a fundamental change to the basis for costing the organisation’s staffing. The management accounts will show variances (differences between budget and actual) every month and will have to keep explaining the same reasons for the variances. So the proponents of flexed budgets would prepare a new version of the budget with revised assumptions.
Recently I saw an example where a whole programme of work was shifted and integrated into another programme. Operational plans were changed but changes were not made to the budgets. Operational managers trying to understand the management accounts could not make sense of them because of the disconnect between their plans and the numbers. Unfortunately, variances were all interpreted as caused by the shift in the programme activity, whereas there was a genuine overspend that no one noticed until the year-end.
What are the lessons? The annual budgeting exercise normally takes up a significant amount of managers’ time and energy. It would be a more efficient exercise if organisations were to have an early discussion about the budgeting principles, then go to work on the calculations. For example, what is the context for the budget round? Do you want people to be aspirational, ambitious and innovative? Or is it more appropriate to be conservative, risk-averse and prudent in your assumptions? It would be good to agree, as a manager and trustee group, on the basic rules before you start work on the detail.
Having agreed an approach, trustees and managers need to question whether reasonable assumptions have been made in the budget. The numbers are valid only if the assumptions are realistic.
And should you flex or not? I have come down on the side of flexing budgets for significant changes in assumptions or a fundamental change in the way you operate. And it is possible to show the original budget and the revised budget to trustees and then monitor the revised plan.