Budgeting in not-for-profit organisations

 Not-for-profit organisations, NFPs, are characterised by not having profit as their main objective and include schools and universities, social clubs, sports clubs, sports governing bodies, hospitals, museum / library / arts organisations, government organisations/local authorities and charities.

This page looks at the particular issues NFP organisations face when budgeting.

Things to consider when preparing a budget in a NFP

• No profit motive - but these organisations still need to control costs.
• Non-quantifiable benefits - many of the benefits arising from expenditure by these bodies are non-quantifiable (certainly not in monetary terms, e.g. social welfare). So how can measurable budgets be prepared which meet the organisation's objectives?
• No revenue generated - often revenue is not generated and there is a fixed budget for spending within which they have to keep. 'Value for money' is often quoted as an objective here but it does not get round the problem of measuring 'value'.
• Multiple stakeholders - give rise to multiple objectives so there is a need to prioritise/compromise (e.g. hospital – patients, staff, government, taxpayers, local community, society at large, contractors, management, donors/contributors, etc.).
• Objectives - may be difficult to define, may change as a result of the political process and may be achievable in different ways.

  Objectives

A further consideration is that the distinction between objectives and ways of achieving these is often misunderstood. For example, one public objective is 'to contain crime within reasonable limits'. One means of achieving that objective is to have police officers patrolling the streets on foot. In fact, police foot patrols are a very inefficient method of containing crime. The use of video surveillance cameras and police response units using fast cars is much more cost effective.

Public sector budgets

• Budgets tend to concentrate on planning for one year ahead.
• Incremental budgeting is traditionally used.
• Other budgeting approaches such as ZBB and planned programme budgeting systems (PPBS) have been used.

PPBS

• PPBS breaks work down into programmes designed towards achieving various objectives.
• Several departments may contribute towards a single programme.
• Budget targets may spread over more than one year.
• The means used to achieve programmes should be efficient and cost-effective.

 Efficiency

Efficiency revolves around making the maximum possible use of a given set of resources. That is, it involves a straight comparison of output and input.

Many UK local authorities in the 1970s were judged to be making an inefficient use of the resources available to them. They undertook most of their activities (e.g. council house maintenance, road repairs, maintenance of parks and gardens, etc.) using large numbers of direct council employees. It was often found that the use of obsolete equipment and inefficient working practices (strict job demarcation was widespread) resulted in the operation involving excessive costs.

Financial management initiatives in the 1980s required local authorities to put many of their activities 'out to tender'. Private contractors may submit bids in order to undertake programmes of work for the local authorities. If the councils retain a direct works department, then that department has to bid in competition with private contractors for most available work.

The advent of executive agencies in national government is another example of this approach. Government has devolved some of its functions to agencies (e.g. the DVLA at Swansea) which are run on semi-commercial lines. The performance of these agencies is monitored using target performance indicators (e.g. the average time it takes to issue a new driving licence or the average time it takes to respond to a police enquiry concerning a vehicle).

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