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A guide to producing an annual budget for a company or an individual project.
A budget is an essential tool for planning a new project, making a funding application or drawing up a business plan. It is a practical plan which outlines the cost (expenditure) of a specific project or venture, and forecasts the amount of money it will generate (income), plus any extra finance needed to ensure success.
Budgets detail predicted income and expenditure over a specific period of time and the resulting balance – ideally a surplus or a break-even position. You might have a target in mind – e.g. a surplus of £15,000 at the end of the year, either to pay yourself or invest in the next year’s business. Your budget must show how your predicted income and costs will achieve that position.
A good budget prepares and organises the realisation of your project. It prevents you or your company from running at a loss. It highlights how and where income will be divided. That’s especially helpful for distribution of funds in an organisation where people are working on the same project but assuming different roles with different responsibilities and tasks.
Most organisations work to an annual budget covering all aspects of their business. That allows staff to analyse likely costs and benefits of different activities in advance, and provides an opportunity for making changes. It’s also a useful way to monitor progress on a particular activity or project, and to demonstrate to others your plans for the future.
Project budgets look at income and expenditure relating to that project over the period of time the project runs.
Company budgets cover a twelve-month period and include projects and other activities taking place during that time, as well as the income and expenditure involved in running the company itself.
Income might include:
Direct costs / project costs might include:
Overheads might include:
A budget should also include a contingency to finance the unexpected. The figure is usually 5-10% of the total cost of the project.
It’s good practice to detail in kind sponsorship – services or materials provided to you, your company or the creation of your product given without charge. That might include workshop time, studio space, materials or free advertising. The true value of such donations or sponsorship should be calculated, and the total used as a form of income and support of your project.
If you’re planning to finance with funding from an arts funding body, local authority or trust, you may have to match part of the grant. That could be through a contribution of your own, or funding or sponsorship from other sources. In kind contributions can count towards match funding.
All companies follow a given format when creating budgets (showing income, direct costs and overheads). Most companies’ overheads will include the same headings (see the example budget below). Income and direct costs – i.e. those relating to specific projects and activities - will vary dramatically, depending on the business.
If you’re putting together an annual budget for your company, break it down into headings relevant to your business, and use this as a basis for all financial reports you produce.
When writing a business plan, make sure it includes an annual (or three- or five-year) budget that shows how your plan will work financially.
A small-scale arts organisation has put together an annual budget. They predict their income to be from a range of sources, including a revenue grant, project grants and fees.
The revenue grant and bank interest have been calculated to cover the cost of overheads (£20,050), and the project grants are calculated to cover the project costs (£15,000). Their target is a break-even position of zero at the end of the year.
Their project grants will be obtained on the basis of funding applications that detail the likely costs of the projects. They also estimate some income will be earned from workshop fees.
In this example, two musicians have drawn up a budget for a funding application towards the creation, rehearsal and recording of a new piece of work. The budget details in kind as well as cash contributions, predicted sponsorship income and the amounts requested from funders.
It’s tempting to prepare budgets by costing work, time and materials at ‘best deal’ or ‘well within budget’. It’s a misconception that if costs are kept to a minimum, the project are more likely to receive funding. The opposite is often true - projects are far more likely to receive funding due to:
Similarly, it’s wrong to think that once funding has been awarded, the budget can be adjusted. Funds shouldn’t be redirected to other purposes, like the purchase of unplanned resources. Fees for technical support or project management shouldn’t be scaled down. It’s bad business planning and, as a running business concern, you’ll be accountable for the accurate auditing of your business accounts.
Instead, make sure your budget is properly prepared and researched. Spend time considering labour fees, administration, essential equipment, materials and miscellaneous costs. Don’t forget to include contingencies costs.
When creating your budgets, either for a project or the company as a whole, make sure you put in the most realistic estimates of income and expenditure. If, once you’ve done so, the resulting balance is a loss, you need to review all aspects of the budget.
Don’t overestimate your income to make up the shortfall. Instead, look at your expected costs. Is there a way to keep them down by, for example, negotiating better terms with suppliers or using less expensive materials? Do you need an office or studio, or can you share one? Are you charging enough for your work? Are there other things you can do to earn more money with little outlay?
Creating a budget can throw up questions you might not have considered before. It can help you evaluate the business, and provide opportunities to improve it, make it more efficient and ultimately, more successful.
The three budget plan is a useful system when creating a new project. It’s more time consuming, but worth the effort. In the long term, it will help with the realisation of your project, and provide invaluable experience in budgeting and preparing proposals for agencies and funding bodies. It will aid negotiation and help achieve your aim - to create your work without artistic compromise.
This considers the best possible scenario, including payment for a period of research and development, running costs of the creation period, administration, and ample budget for material costs and fees. Ideally, this would be budget included in your business plan, or submitted to funding bodies for support.
This is reworked from Budget A, and should show how you could achieve some savings without compromising the original aims of your project or the quality of work and artistic content.
To be considered within the same deadline, this budget shows how the project could only just be realised without artistic compromise or allowing the initial aims and intentions to suffer.
The ultimate goal is to create your vision of the proposed work on a minimum budget, without compromising artistic integrity or allowing the creation of sub-standard work.
Due to lack of funds, many projects are begun without securing the finances to create budget C. Without those funds, artistic quality and content is bound to suffer. If that funding is not in place, you need to question whether to go ahead at this stage. Could an alternative project be realised without compromise in its place?
A realistic budget is an invaluable management tool. It can also be an effective way of convincing other parties - funders, lenders, prospective clients - that you’re organised. It shows you’ve given the project or activity sufficient thought and that you can back up your proposals with a realistic financial plan.
To convince someone you have a good business idea, and that they should invest in it, you must show you understand the financial implications as much as the artistic ones. It will help you negotiate with them. For example, if you can show how you’ve calculated fees and what you’ll use them for, you’re more likely to persuade them to support you.
Potential funders may also want to see other financial information, for example your latest accounts, actual income and expenditure on a project and perhaps a cash flow forecast. Your budget should form the basis for these other reports and give you a clear structure for moving forward and taking decisive action.
All budgets will differ in their content, as they reflect different types and scales of project. The rule to remember is to cover all financial outgoings in one chart, balanced against all aspects of potential income in another. If, when completed, the expenditure matches the income for the project, you’re on the right track.