Cost: Types & Principles, Budgets and Budgetary Control

Components of Financial Management

Cost Concepts

What is a cost

A cost is the value of money that has been consumed to produce something or deliver a service and is not available for use anymore. Costs are classified in various ways according to needs of organization.

Types of cost

Capital & Revenue cost:
- Capital Costs: Capital expenditures are typically one-time large purchases of fixed assets that will be used for revenue generation over a longer period - more than one year.
- Revenue Costs: Operating expenses, which are short-term expenses used in daily business operations.
Fixed and Variable Costs:
- Fixed cost: Does not change in total within a reasonable range of activity. Per unit cost decreases with increased volume and vice versa.
- Variable cost: Changes in proportion to changes in volume or activity.

Types of cost in nonprofits

Program Costs: Direct benefit to beneficiaries. Called direct costs as they can be attributed to a program/intervention.
Overheads/Indirect/Common costs: Core costs for admin and fundraising. Not directly attributable to outputs.
- Indirect cost rate should be worked out with a common cost policy.
- Common direct cost is also an indirect cost.

Cost Principles in Grant budgeting

Allowable cost: Not restricted in grant award.
Allocable cost: Incurred specifically for grant objectives.
Reasonable cost: Necessary and prudent.
Consistent cost: Applied similarly throughout grant.
Unallowable cost: Cannot be paid under the grant.

Fund Accounting

What Is Fund Accounting?

NGOs use fund-based accounting to manage grants. Focus is on accountability over profitability.

Good internal control and reporting systems.
Helps governing body comply with fund use guidelines.

Types of funds

Unrestricted funds:
- Corpus (non-refundable)
- Designated/earmarked funds (not legally binding)
- General funds (includes surplus/deficit from I&E)
Restricted funds:
- Given for specific purposes, includes donor-specified and fundraiser collections.
- Endowment Funds: Invested to generate income for a specified purpose.
Temporarily restricted funds:
- Cannot be used till donor-imposed conditions are removed or time expires.

Budgets

What is a budget?

A plan of income and expenses over a time period.
Analysis of fund flow across operations.
- Anticipated Funding
- Boundaries of Expenditure

Excuses for not budgeting

Know it in mind.
Can't predict future.
Budgets are for banks or big organisations.
No time/resources.

Why Budget?

Helps achieve program objectives.
Checks if funds are enough for the plan.
Gives direction.
Tool for grant monitoring.

Pre-Requisites for Budget

Org structure
Statistical data
Chart of accounts
Managerial support
Formal process

Process of Budgeting

Form a Budget Team: Include CFO/CEO, accounting, program, HR, BD staff.
Set Timelines: Enough time for discussions. Start 2 months before year-end.
Decide Goals: Programmatic, financial, strategic (if any).
Draft Budget:
- Income: Projected income based on expected activities.
- Expenditure: Program costs documented.
- Format should be easy and assumptions noted.
Review Draft: See if it meets goals. Adjust based on income/expenses.
Approve Budget: Through committees and board.
Implement Budget: Enter in accounting system. Setup variance analysis.

Types of Budgets

Activity-based budget: Covers costs of project activities (e.g., workshops).
Line-item budget: Budget under broad categories. Preferred by donors like USAID, EC.

Other types

Incremental budgeting: Adds or subtracts from current budget.
Value Proposition Budgeting: Allocates based on value to customer.
Zero-based budgeting (ZBB): Starts from scratch.
Performance based budgeting: Links resources to outputs.
Fixed budget: Doesn’t change with activity.
Flexible budget: Adjusts with activity.

Balanced, Surplus, and Deficit budgets

Balanced: Revenue = Spending
Deficit: Expenses > Revenue
Surplus: Revenue > Expenses

Variance Analysis

Compare planned vs actual regularly.
Identify, analyze, and report variances.
Plan for justified revisions and inform donors.

In grant management:

Track income & expenses by budget lines.
Record budget vs actuals timely.
Check for deviations and get approvals if limits are crossed.

Points to remember while Budgeting

Match budget items with Chart of Accounts.
Follow org's accounting method (cash/accrual).
Be conservative in estimating income.
Add percentage for benefits like insurance, gratuity.
Build contingency fund.
Do monthly variance analysis (budget vs accounts vs deliverables).
Large orgs: budget by project or cost center.
Capital expense: Plan cashflow; may use surplus or financing.
All budgets need not be balanced.
Bad budget = long-term burden.
Use real, reliable cost estimates.
Keep budget realistic.

Journey of Project Budget

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