Funding Formula Stage 6

Developing a budget

1. How to develop a budget for your proposal

Developing budgets for your project or your organisation is a time-consuming task.

A project budget simply refers to a document which specifies how the money will be allocated to implement the activities described in the proposal. The budget gives a clear picture of all expenditures involved in carrying out a project. In short, a budget is a description of the project in numbers. While there are many ways to organize a budget, most are comprised of two main sections: income and expenses.

1. Income includes all sources of project funding – grants, donations, the value of in-kind gifts, the value of volunteer hours, earned income, matching funds etc.
2. Expenses or expenditures enumerate how and where that money will be spent. Expenditures may be itemized, summarized by category, activity etc.

It is also important to note that project budgets are just one of the many types of budgets NGOs may need to maintain. Others include operating, program, and projection budgets.

Often a budget is a simple format attached to a project proposal and you need to fill it according to the activities and strategies proposed in the project. However, when you start opening up a proposal backwards, you will realize that the budget is a critical component of the project. In fact, the budget determines the boundaries of the project. A budget is also one of the final determining factors for a project to receive its funding. If the budget is too high, the donor may ask you to reduce it or, in some cases, reject the entire proposal if it is a highly competitive application process.

So understanding and developing a budget is an important exercise of your proposal development process. In other words, “it is a programme explained in monetary terms.”

We need a budget not just to plan your project expenses but also to convince your donors that you will deliver value to whatever money they give to the project.

2. What does the donor look for in a proposal?

A project proposal is a lengthy document comprising several different components. There is an introduction, a background story, an explanation to justify the project; there are of course goals, objectives and strategies. But what is that single page in the proposal to which every donor would turn and look into before giving a final decision?

For every donor, it is important that there is transparency in the process of developing and implementing a project. Transparency involves stakeholders, sharing ideas and building the project with every activity connected to your goal and objectives.

The one key thing that influences most donors is your budget. Some donors read your proposal backwards to make sure that the proposed budget is within reasonable expectations. If the budget is too high (or even too small), the donor will not read the rest of the document.

When you are developing a project proposal, you need to check the application guidelines to find out if a budget limit has been mentioned. If not, collect intelligence about it. You can call the donor agency or research past projects to find out theie budget limit.

3. What are the types of budget?

There are two types of budgets: activity budget and line-item budget.

1. An activity budget covers the costs required for implementing a project activity. For example, if your project is building the capacity of civil society , and you organize workshops as part of the activity, then organizing workshops has costs involved: there are costs towards hiring people, booking a venue, food, lodging and materials. When developing an activity budget, you need to break up each and every expense as given below. Make sure you list the unit costs of each expense.
2. A Line-Item budget can be complicated. A Line-item budget requires you to present the budget under broad areas. As you can see in the image below, there are categories (in most cases, given by donors in proposal formats) and you are required to break the budget under these categories. Major donors such as USAID and the European Commission prefer to have their budgets as line items.
3. How can I develop a project budget?

A project proposal has several components such as project goals, objectives, results, strategies and activities. An ideal way of starting to develop a project budget is to look at your project activities. Although the project development process requires you to go back and forth from goals, objectives to strategies and activities and back again, once your activities are ready, you have achieved a level of clarity.

No matter how complicated the budget format of a proposal application is, the first step is to note all your activities and attach costs to them. This is the most logical and easiest way to develop a budget for a proposal.

5. Other costs that can be mentioned apart from activity costs in a project budget

Donor agencies emphasize on covering activity costs. In fact, some donors can only fund activities. However, for larger project proposals, there will be overheads and staff costs on top of the activities that are listed. To implement activities you are required to have human resources, an office and other operational mechanisms. These costs often fall under the line-item budget.

Human resources can be costs towards salaries for project officers, project assistants, accountant or consultants responsible for implementing the activities. Operating costs such as rent, telephone, travel are necessary to support the successful execution of your project.

Costs towards monitoring and evaluation should also be included in the budget. In most project proposal formats, donors require NGOs to submit a monitoring and evaluation plan. This plan may require extra costs such as hiring an external evaluator or carry out extra research work. The costs associated with such a process can be mentioned in the budget.

Contingency costs can be added if your NGO is working in a volatile situation where conditions are fragile and unpredictable. Costs will need to be disggregated and explained.

6. How to calculate staff time in a project budget?

In some project proposal formats, “staff time” or the number of “man hours” are required in the project. Large donors are very meticulous about these details and require very specific calculations: they expect budgets to be clear to the last detail.

Salaries can be a sensitive part of the project budget – even for the donors. It is important for NGOs to be absolutely transparent about this part of the budget. Donors are happy to cover salaries if properly justified. You should:

• calculate the number of hours/days staff are planning to dedicate to the project
• reflect your local conditions and local market salary rate
• not inflate salary costs unnecessarily: to justify that you are paying the salary as per the local market rate, you can refer to some examples like government salaries or other project salaries

7. How can I include overhead costs in my project budget?

Overhead costs refer to those expenses that are required by the organization to run its operations and they do not cover any direct expenses of project activities. However, they still form a part of many project budgets.

Overheads can include office rent, telephone expenses, accounting fees, salaries to the organizational staff, repairs, supplies, travel etc.

You should first refer to the proposal submission guidelines to find out if the donor agency allows you to include overheads or administrative expenses in your project. Some donors will only fund activities and propose overheads should be sourced elsewhere.

Almost all donors want NGOs to specify a certain percentage of the overall project budget for overheads. In most cases, it should be 10%-15%. Once your project is approved, there may be some scope for revising budgets; you can negotiate directly with the donor for increasing overhead costs.

8. What is a matching contribution and how to access it?

Sometimes RFPs and other donor proposal guidelines advise that only a certain percentage of funding will be given for the project. So where will the remainder come from?

• own resources
• another donor agency
• the beneficiary community
• local authorities

One important element of matching contribution is that it does not necessarily have to be in monetary form. You can explain to the donor that you or the beneficiary community is willing to provide in-kind contribution to the project. In-kind contribution can be your organization’s office space, the staff time of some of your existing staff, or your Member Association’s core funding. In-kind contribution from the community can be in form of land and labor and the costs can be evaluated – at current market rates – and presented in the budget.

9. Other uses for budgets

A budget can tell a donor a lot more about the project and NGO than just the price of goods. Donors look to the budget to see:

• Transparency – are you willing to share staff salaries, overhead costs, and other sources of income?
• Value for money – what is the value of your impact compared to your project cost?
• Capacity – does your financial history show you are able to efficiently manage a program?
• Competitiveness – how do your costs compare to other applicants?
• Following guidelines – did you read and abide by the donor’s instructions?

10 quick tips for writing a great budget

The budget is one of the most important parts of the proposal. Consider it an explanation of your project in numbers. If you do great on your budget, the donor will immediately see that you know what you are talking about and are an expert in your field.

But many people dread budgets and try to avoid them whenever possible. While words leave a lot of open space, numbers can be intimidating and much more precise. Here are 10 quick tips on how you can write great budgets and overcome your fear.

1. Don’t leave it for last

Many grant writers dread budgets and leave them for last. If you do that, you run the risk of having to rush them and not doing your best work on them. Do not make this mistake. The budget should evolve with your proposal and you should constantly work on it while you develop your project. If you work on it simultaneously, you will not have this scary and huge task at the end.

2. Make sure you have all the correct numbers

To write a correct and sound budget, you need to know what the prices of things are. Make sure you can find out these numbers and have the resources to do so. Sometimes it can be as easy as an online research, sometimes it takes more time if you have to consult people from your beneficiary group. Make sure you have the right numbers in time though.

3. Chose one format and stick with it

It is very important that your budget follows a format that is easy to understand and gives a good overview. Make sure that it is not only correct but also looks nice. You can organize your budget by activity or by line item.

4. Check the math – not only once

It is of crucial importance that you check the math of your budget – not only once. If you make a simple addition mistake somewhere, your entire budget can be off and this can make a very bad impression. Make sure your numbers add up and are in the right spot. Have someone go over it with you, so you can be 100% sure of its accuracy.

5. Calculate realistically

When writing your budget, you should always work with realistic numbers. Do not underprice or overprice, because both things can become a problem for you. If you state prices that are too low, you will have problems implementing your project later. If they are too high, the donor might notice and not give you the grant. Be realistic in your budget.

6. Make sure you include everything

There are many different types of costs that you can and should include in your budget. Make sure you take into account all of them. Did you include transportation, food for workshops, stationaries, salaries for trainers? All these things cost money and should be part of the budget. If you have to show a copayment, you can also include the contributions of your beneficiaries, even if they are in kind or in form of work.

7. Make budget writing a group activity

Do not write the budget all by yourself. While one person should have the lead on the project, you should seek the input of various people in your organization. You might forget something or lack the detail knowledge in some areas. Take advantage of the combined knowledge in your organization.

8. Think about inflation and exchange rates

When writing a budget for a project proposal you should keep changing prices in mind. If you live in a country with a high inflation rate or work in a field where prices for goodwill likely rise, include a margin for that in your proposal. The same goes for exchange rates if you have to write the proposal in a different currency, make sure that you include a margin for potential changes in the exchange rate.

9. Explain extraordinary costs

Make sure your budget is self-explanatory. If something needs further explanations, make sure they are right there and easy to find. Costs that are extraordinarily high need extra attention to make sure your donor does not think you are trying to take advantage of them.

10. Have someone proofread your budget in the context of your proposal

Like the project proposal, your budget also needs proofreading. We have already talked about how important it is to have the numbers right. It is also important that your budget fits into your proposal. Sometimes you write the budget first and forget to add an activity later. Make sure that someone looks at the entire proposal as an entity before you submit.