Defining budgets and cashflow forecasts and writing a budget

Use this page to learn about what budgets and cashflow forecasts are and how to write a budget.

A budget is an income and spending plan based on what you are planning to do.

A cashflow forecast predicts when income and expenditure are going to arrive in and leave the bank account.

Your cash flow needs to be consistent with your budget, but they are not the same thing.

The difference between budgets and cashflow forecasts

Both are about forecasting and predicting whether you’ll have enough money – but they focus on different things:

• Budgets predict whether there’ll be enough income overall to cover your costs so you know if you have enough money to go ahead with your plans.
• Cashflow forecasts predict when money will arrive in your bank account. For example, so you can see if you can pay your bills on time.

For regular income and expenditure, like salaries, the numbers often look similar. The difference becomes significant for things like:

• timing of grant payments covering long periods
• capital spend
• VAT
• loans.

You cannot write a useful budget without an action plan. Your budgeting thought process should look like this:

It’s an open-ended process because you may have to go around it a few times before the answer to the final question is 'yes' and you can move forward. 

The thought process is the same if you’re talking about an annual budget for the whole organisation or a one-off budget for a project.

One of the things that seem to put people off writing budgets is the fear they’ll 'get it wrong.’ Don’t worry about that because you will – no one can predict the future – but there are ways to reduce and manage the uncertainty.

What you’re aiming for in a budget is an intelligent estimate based on the best available information at the time, which might come from:

• evidence from ongoing work, both income and costs (this year’s rent has been £x, we’re not expecting to move and the landlord has indicated there will not be a price increase, the budget for rent is £x)
• intelligence gathering (cost of living salary increases in the sector averaging y%, fuel prices rises expected z%, what’s the impact on the budget?)
• best guess (we haven’t held an event like this before, if 10% of the families in the village came, that would be Z0 families at £10 per family – budget income £Z00)

Make sure you keep a record of what all those assumptions are, it’s surprising how easy it is to forget them.

• If you’re working on a project budget, and want to know about full cost recovery – our section on project costing looks at this.
• Visit the West Yorkshire Community Accounting Service (WYCAS) website for access to a range of budgeting templates.

NCVO worked with Rachel Cooper at Welbeck accountancy to create this guidance.