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

1. Form a Budget Team: Include CFO/CEO, accounting, program, HR, BD staff.

2. Set Timelines: Enough time for discussions. Start 2 months before year-end.

3. Decide Goals: Programmatic, financial, strategic (if any).

4. Draft Budget:

   • Income: Projected income based on expected activities.

   • Expenditure: Program costs documented.

   • Format should be easy and assumptions noted.

5. Review Draft: See if it meets goals. Adjust based on income/expenses.

6. Approve Budget: Through committees and board.

7. 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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