All budgets itemize the costs that are expected to be incurred by a set of activities; most budgets also specify the income that is expected to cover these costs. A budget can be drawn up for a single activity, such as a training workshop, or for a whole program or organization. A program or organization should use the operating budgets of all its internal operating centers (such as a regional CBD program, a department, or a clinic) in developing its own operating budget. An operating budget is based on the year's work plan and on information about centralized costs. It itemizes the cost for one year of carrying out all activities and the expected income that they will pay for them.

Just as the work plan is based on the long-term plans, the budget also relates to the financial plan and thus reflects the financial aspects of the long-term plan.

Budgeting is important because:

• The exercise of preparing a budget forces managers to think each activity through in detail and commit their thoughts to paper;
• Budgets give managers essential information on the projected expenses and income associated with planned activities; this information lets managers know whether all planned activities are financially feasible and whether more income needs to be raised or costs need to be reduced;
• When developed in accordance with work plans, budgets help managers to ensure that organizational resources are spent only on planned activities;
• The planner is forced to differentiate between essential and non-essential activities and to give essential activities a higher priority;
• By listing in detail the projected expenses and the expected funding sources, budgets help the organization to prepare to secure the resources needed to meet these expenses;
• Budgets allow managers to evaluate the actual costs of activities and thus to consider alternatives if the planned activities are too costly;
• By having a realistic, updated budget and comparing it with actual expenses, managers can be forewarned of potential shortfalls in the resources that are available for specific activities.

Tools and Techniques - Factors to Take into Account during Budget Preparation

There are two basic steps to preparing a budget: identifying necessary resources and their costs, and determining their sources of funding.

The first step is to specify all the resources that are needed to implement the activities listed in the work plan and to assign a cost to these resources. To do this, look at each activity in the work plan and quantify the time, supplies, equipment, and other costs required to carry it out.

For example, if a district work plan for ongoing community-based distribution of family planning services states that supervisors will visit distributors every two months, then the manager who is preparing the budget has to understand what costs are incurred by this activity. Assuming that many of the distributors live in remote areas which are not accessible by public transportation, this particular activity will probably involve such costs as: the salaries of the supervisors and drivers, fuel and maintenance expenses if vehicles are used on these visits, administrative costs such as office supplies and postage in the district office, and per diem and other travel expenses for distributors and supervisors.

Most of the costs of your activities will be variable costs. These are costs that vary with the volume of service or scope of activities that you will provide. Some costs, however, will be "fixed." Fixed costs are incurred by the program no matter what the level of activity or volume of service is. Examples of fixed costs are rent and utilities, equipment leases or payments, and most salaries. Both variable and fixed costs must be included in your budget.

Example from Rwanda - Variable Costs Budget Worksheet

The second step in budget preparation is to determine where the resources you need will come from and which expenses will be paid for by which funding source. For many public programs, this step is simple because there is only one funding source, the government. But in private programs or in public programs that receive private money or charge fees to generate income, the task of identifying ways to finance activities is more complex.

Tools and Techniques - Tips For Budget Preperation