Kate M: Imagine this. The treasurer is preparing next year's budget. They open last year's budget and start working down the spreadsheet. Every figure gets a little increase for CPI. Membership income goes up, expenses go up, insurance, electricity, supplies, everything gets a little percentage added.

Kate H: The budget goes to the next committee meeting. There are a few questions, a couple of adjustments, and it's approved.

Kate M: And everyone feels reasonably comfortable because after all, the treasurer has crunched the numbers and the budget is based on actual figures from last year. Except there's one small problem. Nobody has actually budgeted for the year ahead.

Kate H: They've budgeted for last year plus CPI.

Kate M: So on the one hand, the budget looks very sensible. But in fact, Kate, looking ahead to next week's episode, you could call this budget a zombie budget. It's last year's budget, still walking around with no thinking going on inside. It hasn't asked the important questions. What are we planning to do differently?

Are membership numbers changing? Is there a new program? Does something need replacing?

Kate H: CPI is very good at increasing numbers. It just isn't very good at planning.

Kate M: And that's where the trouble starts. Your budget is the very first draft of the story you're planning to tell this year. So you need to make sure that you're actually planning the next year, not just giving last year's story a pay rise. Welcome to The Committee Room.

Welcome back to The Committee Room. I'm Kate Hartwig.

And I'm Kate McPhee.

Kate H: We help small, time poor, volunteer led committees run better meetings, make better decisions and build stronger structures and systems with less stress and less mess. This is the third episode in our Financial Confidence series. Last time, we learned to read the financial story and hopefully retired a few court jesters along the way. Today, we're showing you how to write your organisation's next chapter, building a budget, planning your cash flow and using your assets registered to plan ahead.

Kate M: And for anyone who, like me, suddenly remembers something in the oven when the spreadsheet comes out, stay with us. Today is basically a recipe.

Kate H: You decide what you're baking before you buy the ingredients.

Kate M: Exactly. Nobody adds 5% more eggs to last year's Victoria's sponge and hopes it turns into a pavlova.

Kate H: And a quick note before we start. This podcast is for general information on best practice governance for small to medium associations. It is not legal, financial or cooking advice.

Kate M: That's right. So let's get our aprons on and let's get into it. Let's start with a habit we see in a lot of small associations. So the treasurer sits in a dark room with a bright computer screen and last year's figures, gives them

a bump and brings the draft budget to the next meeting. Everyone approves it, but nothing in it connects to what the organisation is planning to do.

Kate H: Because the budget isn't the treasurer's homework. Financial planning is a job for the whole committee. Your strategic plan sets the big goals for the next few years.

Your operational or action plan sets out what you'll do this year. The budget is the money side of both for the next twelve months.

Kate M: And if you're thinking, dear listener, plans, what plans, you're not alone, and we're gonna come back to strategic planning in our next series. So let's start with the three questions to ask around your committee table. Ask what are we committing to this year? What will it cost, and what income can we realistically expect?

Kate H: Now that conversation needs to happen before anyone opens a spreadsheet. The spreadsheet records the decisions, it doesn't make them. And this is where a finance subcommittee becomes your committee's financial superpower. Two or three people, chaired by the Treasurer, take the committee's strategic and operational planning decisions and turn them into a draft budget.

They check the figures, test the assumptions and bring a recommendation back to the full committee for approval. The Treasurer isn't sitting alone with a spreadsheet and the whole weight of the year on their shoulders. And if the Treasurer steps down, someone already knows how the budget was built. If you don't have a Finance Subcommittee yet, budget time is a good reason to start one.

Kate M: Most associations run-in July to June financial year, so the budget needs committee approval by June at the absolute latest, which means the conversation needs to start well before that, you know, not the night before the June meeting with the treasurer and a packet of tim tams.

Kate H: Then you build the numbers, usually with two methods. Historic budgeting is for the steady items your rent, insurance, utilities, subscriptions. Look at three to five years of figures and check what's changing. Also have a look at your current situation.

Is the insurer warning of an increase? Is the council putting up lease fees? Has the cleaner put their rates up?

Kate M: And the other method is zero based budgeting. So that's for anything new or unpredictable.

You start from zero and you build the number up from what you plan to do. So if you're hosting a regional carnival for the first time, you cost it from scratch. And you don't count just the obvious things. You need to think about things like, you know, all the skip bins and traffic management and extra power for the food vans and the council permits, all that kind of stuff that adds up very quickly.

Kate H: And whichever method you use, estimate conservatively. Kate has a nice rule for this in Just a Tick.

Kate M: I do. So estimate expenses high and income low. So for example, for electricity, you don't average last year's bills. You take your highest monthly bill and multiply it by 12. So for income, you do the opposite.

If your membership numbers go up and down, then you budget on a lean year, not your best one. And remember that grant money often, often arrives later than promised. So you want to guesstimate conservatively and give the organisation the best chance of tracking ahead of budget all year instead of having to deal with a shortfall every month.

Kate H: And the same goes for untried income. If you've never run a fundraising gala before, budgeting $50,000 surplus from it is optimism, not planning. You don't know how many tickets you'll sell, what the venue and catering will really cost, or whether the auction items will go for anything near what you had hoped, or whether you'll get any auction items at all. You've got no track record to base the numbers on. So budget what you can defend and treat anything above that as a bonus.

Don't let your committee's enthusiasm run away with you.

Kate M: Now two episodes ago, Kate, you said there was a phrase you'd like to bury in a deep, dark hole.

"We budget to break even", and I stand by that. A break even budget means that if anything goes wrong, there is nothing to fall back on. No buffer when a grant falls through, nothing set aside when equipment wears out, and when costs finally catch up with you, as they always do, fees have to high jump and the members are rightly upset. Breaking even sounds responsible, but it's actually just a slow way to send your organization broke.

So when you build the budget, the surplus goes in as a planned budget line. It's not, you know, just whatever happens to be left over if you're lucky. You decide how much your organisation needs as a surplus and you plan to make it.

And that surplus has two jobs. First, building reserves towards at least three months of operating costs. Six months is better, twelve months even better than that that's your buffer.

Kate H: That's the bricks in the 3 Little Pings house from last episode. The second job of the surplus is to pay for what your strategic plan says you want, like the building upgrade everyone's been talking about for years.

Kate M: So the question at the budget meeting isn't can we break even? It's how much surplus do we need to make our plans happen? And that is a much more interesting conversation.

Kate H: Now, Kate, we should also note that sometimes the Committee will plan for a deficit budget. Maybe they are needing to invest in a new program or into something untried, and they make that conscious decision to spend some of their previous surpluses this year. That's a perfectly valid choice to make, but let's make sure it's a choice, not a surprise. So you've got your annual budget. That's half the plan.

The other half is working out when the money comes in and when it goes out. That's your cash flow budget. An annual budget tells you what your total income and spending should be for the whole year. A cash flow budget tells you when the money moves month by month and the timing matters as much as the total.

Kate M: The royal coffers from last episode was the history of your cash. The cash flow budget is the forecast.

Kate H: So let's put some numbers on it. Picture an association that runs an annual conference in July. January to June, strong surpluses with registrations rolling in. Then July shows a deficit of over $30,000 The venue, equipment, staging all hit at once, dollars 30,000 in one month.

And most of the registration money came in months earlier. So across the year, that's fine. But if they treated that registration money as a windfall and spent it in May, they can't pay for the venue in July.

Kate M: So a cash flow budget shows you in advance which months will be tight. Then you can do something about that. You can set cash aside before a big spending month, or you can move optional spending away from months that already have large bills. The other thing to do is see whether you can make any of that income arrive a bit earlier.

So could your membership renewals fall due before your season starts, not halfway through? Or could you invoice your sponsors before your big event instead of after?

Even if your year is fairly predictable, the big bills tend to bunch up. Think about insurance, the annual audit fee, the end of year exhibition and the volunteer thank you. If they all hit in the same quarter as a quiet patch for income, you want to know at the start of the year, not when the bills arrive. Without a cash flow budget, all you can do is react to the year as it unfolds.

Kate H: With one, you can manage it.

Kate M: In episode 23, we promised to come back to the Assets Register when we got to budgeting. So here we are.

Kate H: Well, the Assets Register is a complete up to date record of everything the organisation owns or controls. For each item you need a description, the purchase price and date, the current value after depreciation, your depreciation schedule, where it's kept and what happened to it when it left. Was it sold, scrapped or just given away to a good home?

Kate M: And why does this matter for the money side of things?

Kate H: Well, two reasons. First, you want accurate reports. Long term assets sit on the balance sheet. Depreciation, which is the gradual loss of an asset's value over its working life, shows up as an expense in the profit and loss. If the register is wrong, your reports are wrong and an auditor will want to know why the register doesn't match the reports.

Kate M: And the second reason?

Kate H: Well, planning. The register tells you what's wearing out and roughly when. If you know the ride on mower has about two years left in it, you can start setting money aside now rather than finding out the week the grass is knee high and the match is about to start.

Kate M: In Just a Tick, I call that a sinking fund. So that's when you quarantine a little money each year for a big purchase or a big cost that you know is coming. That is much easier to manage than a surprise bill and an emergency sausage sizzle or 10. And if you own the castle from last week's episode, your club rooms, your hall, or your community center, that's your biggest asset and also probably your biggest future bill. So you remember the foundations of the kingdom part?

This is where those foundations need looking after because roofs leak, hot water systems die, carpets wear out. So the building needs an asset management plan. It needs regular inspections, maintenance done before things become urgent and a record of what's been done and what's coming. That plan feeds straight into the budget each year. Otherwise the castle slowly crumbles and the turrets start falling off one by one.

Kate H: And what about those things you lease rather than own? Well it depends on the lease. A finance lease where you pay something off and own it at the end like a vehicle on finance, well that goes in the register. An operating lease where you rent it and hand it back like the photocopier is just an expense.

Kate M: And that shiny new mower, when it breaks down, the asset register is where you'll find the serial number and the warranty. If you don't already have an asset register, start one now and update it at least once a year, because no organisation can insure, maintain or replace something that they don't know they have.

Kate H: Approving the budget isn't the finish line. It's the starting line. Every month, the Treasurer's Report should compare the actual figures with the Budget. Remember the plot twists in the Variants column from last episode? The Committee needs to see where things are on track and where they're not.

And when something big changes, the Committee needs to recognise it and plan for the variance. And that change might be bad news, like an unexpected repair bill, or good news, like an unexpected benefactor that gives money that the Committee now gets to decide how to use. The budget is a plan, and plans work best when you regularly review your expectations.

So good financial management is a set of habits knowing who's responsible for what, reading the reports, building the budget. None of these are one off jobs. They're monthly and annual habits that become part of how the Committee works.

Kate M: And good financial management needs both the right structures and the right habits. The structures tell you what to do. The habits make sure you do it. Good structures set you up and good habits keep you there.

Kate H: And when those habits are in place, a committee can really feel the difference. People turn up having read the reports, skimming them on the phone under the table while the treasurer talks and hoping that nobody notices. Someone asks a question early while the problem is still small enough to fix over a cup of coffee. The treasurer is no longer the only one holding the purse strings. In fact, the treasurer feels supported, not left on their own, because everyone around the table shares the load.

Decisions about money get made on the facts, not on gut feel or whoever argues the loudest. And when the treasurer finally hands over the reins, the next person isn't left with spreadsheets called budget final, budget final version two, and budget final final, and no idea which one is the latest. The finances stop being something everyone quietly dreads and start telling you the story you need to know, which is what they were meant to do all along. Let's bring it all together. The budget is a planning tool, not a spreadsheet exercise.

Kate M: So talk first, then build the numbers. Use history for the steady items and zero based budgeting for anything new. Expenses high, income low. And then plan your surplus on purpose. Build a cash flow budget so you can see when the money moves.

Kate H: Keep your assets registered current so your reports are right and replacements don't become emergencies. And use the budget all year, not just on the night you approve it and the night you say, what happened?

Kate M: So listeners, your improvement challenge for this week.

Have a look at how this current year's budget was built. Did more than one person build it? Does it include a planned surplus? Does it have a month by month cash flow view? If the answer to any of these is no, put the next budget on the agenda now, not two weeks before the end of the financial year.

Kate H: And to give you a little hand, we've put an assets register template in the show notes from The Committee Companion. Download it and use it as your starting point. And that brings our Financial Confidence series to a close, at least for the time being. In the meantime, if these episodes have raised questions for your committee, whether your report's telling the whole story, whether your budget connects to your plans, or whether you've got the right structures in place to protect your money, we can help through our own businesses or together through Fresh Allsorts. You can find us at freshallsorts.com.au or in the show notes.

We'd love to hear from you.

And if you've got a governance question you'd like us to answer on the show, the contact form is at thecommitteeroom dot com. Au. And Kate, we have something new to announce.

We have established a Committee Room WhatsApp community. Our WhatsApp number is 421451655. So this is another way of getting in touch and it means that if you want to be a radio star, you could leave us a voice note with your question or just tell us about your experience in a not for profit organisation. Links and details will be in the show notes.

Kate M: So if you've learned something today, listeners, please don't keep it to yourself. Subscribe wherever you get your podcasts and share the podcast with your committee so that you're all learning together, especially whoever's about to start on next year's budget. The show notes are at the committeeroom.com.au.

Next week, we're turning the lights down low for our Halloween special Governance After Dark. Zombie decisions, ghost policies, the werewolf committee member. We're talking about all the creatures that lurk in committee rooms, and because we're not scared of the big bad wolf, how to get rid of them.

Until then, I'm Kate McPhee, Kate two, and I'll be in the kitchen working out what a Pavlova really costs.

Kate H: And I'm Kate Hartwig, Kate one, looking forward to eating, said Pavlova.

Kate M: And this has been the Committee Room. Remember.

Kate H: You don't need good luck if you've got good governance.