FinOps Partners

The Ultimate Guide to Charity Budgeting for 2025

A budget is a document that gives you a clearer understanding of your charity’s income and expenses for the year ahead. While you’re not legally required to create one, and you don’t have to follow it rigidly, having a budget is essential if you want to avoid missing key financial opportunities.

If you’ve never created a budget before or weren’t satisfied with your previous ones, this guide will cover everything you need to know about charity budgeting. Keep reading to learn why a budget is important, which approach works best, how to create one, and how to use it to benefit your organisation.

Why Create a Budget for Your Charity

Budgeting takes time and requires you to look at your previous income and expenses whilst trying to predict what you’ll deal with in the year to come. Some charities start building their budget a few months in advance and use detailed templates to make sure everything is accounted for. Others use more simplified budgeting methods. The point is every organisation should have one, and here’s why:

Keep an Eye on How Your Charity’s Money Is Spent

Charities need to pay attention to how they spend their funds. Whilst some are unrestricted and can be used for any activity, some funds come with restrictions. This income type allows you to spend the funds only for a specific purpose, project, or activity, as established by the donor or funding agreement.

By creating a budget, you can clearly see your income sources and ensure you use restricted funds for their intended purpose.

Make Better Financial Decisions

It’s difficult to plan for the future when you have no clue about how it may look. If your organisation has ambitious plans for the next year, the first step is to put everything on paper. A budget helps you understand if you have the money to start a new project or if you need to attract new funds.

It also highlights when you’re likely to have a strong year with a high income, allowing you to capitalise on opportunities for investment.

Plus, by comparing previous budgets with your annual reports, you can identify weaknesses and risks in your financial strategy and create a stronger financial plan.

Prevent Overspending

Here’s a frequent mistake organisations make: not accounting for inflation-related increases when they estimate their expenses. A recent report showed that in 2024, 76% of charities in the UK have seen an increase in energy costs whilst 78% experienced an insurance cost increase. If you are budgeting correctly, you can understand how much inflation will affect your charity and make a plan to avoid overspending.

Reassure Donors that Their Money Is Well-Spent

Transparency is key when building trust with your donors. Whilst charities usually keep them up to date through quarterly or annual financial reports, some may ask to see a simplified version of the budget, especially if their funds are restricted. You are not legally requested to provide it, but it can be a good way to show your donors that you are responsible and will use their funds as intended.

Support Annual Reporting

When it’s time to prepare your annual report, you can use the budget to compare your initial estimates against actual income and expenditure and explain financial performance. You can also include key information from the budget to show your donors and stakeholders that you have carefully planned your organisation’s expenses and allocated the funds correctly.

4 Budget Approaches – Which One Works for Your Charity?

Before diving into how to build a charity budget step by step, let’s take a look at the budget approaches out there.

Activity-Based Budget

This is a top-down budget approach that allows you to allocate resources depending on the activities you need to perform in order to achieve specific goals. For instance, if your organisation has a target set for fundraising, you need to identify the activities, such as events or campaigns, that will help you reach your goal and estimate how much they will cost.

Incremental Budget

Incremental budgeting adjusts the previous year’s figures by a set percentage to create the current year’s budget, making it simple and widely used. However, this approach sometimes perpetuates inefficiencies, encourages budgetary slack, and overlooks external factors like inflation.

Charities may inflate budgets to appear efficient or avoid cost-cutting. It’s effective when cost drivers remain stable but can be problematic when external influences significantly impact costs or performance.

For instance, during COVID-19, it was easy for charities to access funding, says Jane Shute, Head of Fundraising at Age UK Gloucestershire, but it became increasingly more difficult for small organisations to receive funding once those pandemic or cost-of-living crisis-relate relief grants were no longer available.

Value-Proposition Budget

Value proposition budgeting ensures every item in a charity’s budget delivers meaningful value. It prompts key questions: Why is this expense included? Does it benefit donors, beneficiaries, or staff? Does its value justify the cost? If not, is there another valid reason? This approach fosters thoughtful spending, avoiding unnecessary costs., you can change the document to remove this provision.