[Editor’s note: This post includes templates to download and use]
The Think Tank Stress test post discussed the importance of having forecasting tools in place in order to assess the sustainability of a Think Tank in light of possible internal and external shocks. Such forecasting tools are of great importance for an organisation and each department within the organisation should have tools and systems in place that can feed the required information into the organisation-wide forecasting tools.
This post is based on my experience in a British think tank and will focus on managing budgets at Department Level.
Managing budgets at Department Level
Managing project budgets at department level is very much aligned with the project’s life cycle, which in a think tank generally includes the following stages:
- Developing and submitting a research proposal;
- Project Initiation;
- Project Implementation, Management & Monitoring and
- Project Closure/Completion.
This may sound obvious but when preparing a proposal to a potential funder, it is important that the budget reflects the real costs of the project, including a share of the central running costs, i.e. indirect costs that are not directly attributable to specific research projects such as: support staff costs (HR, Finance, IT, Admin), office rent, electricity, etc. There are different methods to allocate these indirect costs to the research projects. Some organisations include them as an overhead in the researchers fee rates; others include them as separate lines in the budgets. Others even do both. This will depend on what the potential funder is willing to accept.
In general, the budget should always detail and separate what is an income (e.g. researchers’ fees) for the think tank and what are expenses (e.g. costs of subcontractors, travel, etc.)
The format of the template depends on whether the funder wants a certain budget template to be submitted along with the narrative proposal. If that is not the case, it is recommended to already use a template that is standard in the organisation to set up a new project, i.e. a project budget template such as this one: project budget template.
Once a proposal is successful and, depending on your business model, the contract is won or the grant has been awarded, the proposed budget needs to be transferred into a “project budget” using an organisation-wide project budget template. This template should be set by the central Finance Office or Department, including all the information Finance needs for accounting purposes.
The more detailed and aligned the proposed budget is with the standardised project budget template, the easier it will be to transform the proposed budget into a project budget.
The administrator within or assigned to the department should keep the budget up to date and work closely with the Finance department or a designated Project Accountant to generate the information needed for organisation-wide finance tools (forecasting and analysis).
The project budget should give details about the project, such as project name, reference number, project manager, start and end date, the budget (in case of the funding being in another currency than the working currency, both currencies need to be included), exchange rate details, etc.
It needs to show income and expenses separately, i.e. researcher fees (which are the actual income and the contribution of each department to the organisation’s income) and expenses to the organisation.
Expenses should then be further detailed depending on the project needs. These expense categories (called project ledger codes) should be set centrally by the Finance department to ensure organisation-wide consistency, so they should provide a list with all possible expense categories/codes. Examples for expenses are:
- Sub-contractors (consultant fees),
- Travel expenses (such as flight, accommodation, ground travel, subsistence, visa, vaccinations),
- Publication expenses (e.g. editing, proof reading, printing expenses), etc.
The administrator should be also aware of and inform the project accountant about invoicing, i.e. when, how much and to whom to send the invoice. Hence it is recommended to also keep an ‘invoicing tracker’ within the project budget template.
It is also advisable to keep older budget versions and make notes, in case changes need to be revised or explained at a later stage.
Although the Finance Department should be obliged to keep a record of the income and expenditure on each project, each department should also keep its own records in a format which allows checking quickly where it stands financially and also, at project closing stage, to ensure that all the income and expenditure match with the Finance department’s records. This provides an additional layer of quality control.
Another important reason to set up budget monitoring within the department is to ensure that one is able to easily and quickly report to the donor at intermediate stages of the project as well as the end of the project in the correct format.
Depending on the complexity of a project and hence its budget, the budget monitoring sheet can range from a simple sequential list of all actual expenses to a layered monitoring sheet divided into various budget lines, which correspond with the project budget.
For more complex project budgets, the budget monitoring sheets used can be linked to the original project budget so that actual expenditure can be monitored against the original budget lines. See a simple example here: more complex project budget template.
Whenever there is financial movement on a project the administrator needs to record it on the budget monitoring sheet and also keep a record of the supporting documentation (e.g. receipts, invoices, expense claims, advances) ideally in electronic form and centrally accessible.
A quarterly budget review process should be established with the organisation’s Finance department as a driver to review and update all project finances. A later post on ‘Financial Targets’ will talk about this in more detail. (In some think tanks, in order for the whole organisation to be financially sustainable, each department needs to bring in a certain amount of income every Financial Year. This is called a financial target.)
End of Financial Year / Project Closure
At the end of the financial year (e.g. 31 March in the UK), the project accountant and the administrator need to work closely together to reconcile the project budgets. There are 2 types:
- Projects that have been completed within the current financial year have to be closed.
- Projects that continue into the next financial year need to be reconciled, e.g. each project budget needs to be updated with the actual expenses and income and remainders need to be carried forward into the next financial year.
The administrator has to prepare for this process well in advance to ensure all the information is up to date.
1. Closing projects which end in the current financial year:
Closing down a project financially is necessary to ensure that all expenditure balances with the income on a project. Before closing, it needs to be ensured that:
- All invoices have been sent to the donor and payments have been received and registered in the finance system
- All expenditure on the project is complete, i.e. all contractor and supplier invoices have been received and paid, and have been logged in the Finance system
- All fee information (staff day allocations) are updated and finalised – if there are unspent funds and if the contract allows, the unspent funds could be re-allocated to staff fees in order to boost the department’s income (more about this in the next post about ‘financial targets’). On the other hand, if more funds have been used on expenses, fee days have to be reduced in order to avoid over spending and balance out expenses and income.
Once all financial movement has stopped on a project and the above steps are completed, it is possible to close the project. Completing a Project Closing Document with all the actual income and expenses against payments received aids the Project Accountant to close the project: Project Closing Document template.
2. Reconciling projects which run into the next financial year:
As mentioned above, projects that continue into the next financial year need to be updated with actual expenses and income.
- All fee allocations have to be updated. Any days that have not been used in this financial year, need to be carried forward into the next financial year, i.e. added to the respective staff member in the budget for the next financial year.
- The same has to be done with all expenses (contractors and reimbursable expenses). The current budget has to be updated with the actual amounts spent and remainders have to be carried forward into the next financial year.
- The department target sheet also needs to be revised with the above updates to be able to report quickly on the financial situation of the department (this will be discussed in detail in the next post about ‘financial targets’)
Firstly, this post has focused on how to design and manage a project’s budget taking the department (or programme) as the entry point. The same logic (and tools) can be used at the organisational level if the think tank is not structured along departmental or programme lines.
This post has also stressed the importance of certain roles and responsibilities that should be assigned to individuals or teams, depending on the size of the organisation. Each of these roles need to be accompanied by particular skills: e.g. financial and administrative.
Thirdly, budgeting is more than a simple administrative task. In the description of the role that budget design and management plays it should be clear that effective budgeting can make a huge difference to the think tank’s financial health. Poor budgeting can lead to missed opportunities and even ruin organisations.
Finally, the post has emphasised the importance of having a planned and organisation-wide approach to managing its resources. It is not good enough to keep track of budgets on a project by project basis. This is important but not as much as being able to keep track of budgets at the programme or organisational levels. This is where strategic decisions concerning the financial health of the think tanks are made.