Ditch the budget: How to improve financial reporting for trustees

09 Jan 2017 In-depth

Hilary Seaward proposes how to make financial information simpler and more relevant for trustees.

As you scan the management accounts with all those columns of numbers comparing actual to budget, have you ever stopped to consider where the word budget comes from?

It’s probably from the old French word meaning a leather purse or bag. But in the sixteenth century the phrase to open one’s budget meant to reveal some secret which was a bit questionable, wasn’t quite all it seemed. A bag of tricks.

Have things changed?

You would be forgiven for thinking not – that the budgets which each year many of us toil an age to prepare are still a sleight of hand. Figures which miraculously balance to zero: are they worth the paper they are written on?

There must be a better way.

To accountants a page of figures tells a story or shows a picture, and once you know what you are doing you can read that story or gaze at the picture and easily see what it portrays.

I wanted to be able to produce a set of management accounts presented in such a way that it allowed all trustees to be able to see that picture or read that story.

I suggest that management reports serve at least two purposes:

  • Monitoring – how much money have we spent and did we spend it on the things we intended?
  • Strategy – are we using our resources wisely to achieve our aims and objectives?

The first purpose is in the present, looking back at past actions. The second looks forward.

The information needed to produce each report is the same; it’s how you present it that is important and will make the difference.

To monitor you need a lot of detailed information. To make strategic decisions you need to be able to see the big picture without getting bogged down in detail.

To work on the issue I set up my own virtual charity – the Phyllis Stein Arts Centre. I devised a programme of activities for the year, made up the figures to go with them, prepared a very dull set of management accounts for the first quarter – figures constructed in such a way that show that the charity is not too stable.

I asked a group of individuals who closely resemble a typical trustee board to participate in a reverse brainstorming session – a useful technique to help see problems in a different light. We posed the question: “what would make the current management accounts worse?”

In answer they came up with some key observations:

  • The figures needed to be put in context, and not presented in isolation.
  • Trustees were more likely to read the management report if shorter.
  • Accounts need to be presented in simple words, not jargon.
  • The management accounts must be a dialogue, not just a one way receipt of information.

I found that the best way to start was with a page that gave only information, no numbers, and poses key questions the finance department felt were important. Then more information with benchmarks, trends, and key figures. Then the detail – but with the necessary information to put it in context.

There are also some key issues with presentation.

  • The brain doesn’t take in boring things; make it attractive to the eye.
  • Remove the distracting clutter on tables and charts.
  • Use lots of white space.
  • Make the font large enough to read easily.
  • Align text on the right-hand side to be closer to the figures

But if that’s how we present it visually, what about the information we’re actually presenting?

Earlier I said there must be a better way. There is, and it’s called “beyond budgeting”. It is a management technique which is perfect for the charity sector, concentrating as it does not on the financial output or profit but rather on outcomes – the impact the charity makes.

Its use in the not-for-profit sector is admirably set out by Adrian Poffley in his book Income to Impact (DSC, 2010).

The notion of beyond budgeting is based on a number of principles. But before we look at those I have to ask a question.

Why do we set a budget?

There are two ways of looking at that seemingly simple query. One is as above: is it for monitoring, or strategy?

The other way of looking at the question is to do with the purpose of the exercise: is it to make an actual allocation of resources to the budget holder for them to spend in the given time frame, normally a year – or is it more an indication of what you would like to spend if funds and circumstances permit? Clearly, it’s very important that the budget holder – the person spending the money – knows which it is. If the budget setter understands one thing and the holder another then we have a recipe for disaster. Yet has anyone ever seen a set of management accounts which clearly states the basis on which the budget was set?

Your answer to the question might be neither of the above, though. It might be: “because we have to”, or “because that is what we do”.

If so, then I’d like to highlight three major shortcomings in the process.


Considering how long it takes to set a budget it does seem unfortunate that it is probably out-of-date the next day as circumstances change. Yet we still cling to it notwithstanding and continue to show it on every set of management accounts. And we expect to judge performance and our strategy against something so irrelevant.

Would it not be better to constantly reforecast? Management accounts are often likened to road maps. If so, it’s vital the map is up-to-date. Use a satnav, not a road map that dates back to before the M25.


Or take what Poffley calls the brick wall. Most budgets take a 12-month view and usually cover the charity’s financial year, a legal concept. This can lead to major distortion of how we think.

Let’s go back to Phyllis Stein Arts. It has a 31 March year-end. But the winter concert series runs from October to May, and the artists are booked at least two years in advance; the education outreach programme follows the school year and work on the July community play begins in earnest the previous September. What relevance is 31 March to the organisation? Things don’t stop at that date then start again. They are ongoing. And as Phyllis Stein Arts has every intention of carrying on its good work, the projects will be ongoing for years to come.

Yet 31 March is the date that governs all the financial reporting. Which could lead project staff to spend the budget in case they lose it. And the Phyllis Stein fundraiser might well be tempted, having reached the sponsorship “target” for the year, to delay signing off on an agreement till the beginning of the next year. Another short-term view.

Use of the budget

We know that the budget is out-of-date but still we produce management accounts which include it for comparison. Every month Phyllis Stein Arts produces a statement which compares the actual for the month against a budget figure, and the same for the year to date and then a variance figure. But how was the month’s budget set? Did the annual budget just get divided by 12? Was it – heaven forbid – just a guess? Is such a statement any use for monitoring or strategic planning? To use the road map analogy, does it show us where we are heading?

What is the solution?

The answer is simply to roll forecasting over a 12-month or longer period.

We may no longer budget but that is not to say we don’t plan for the future and how best to use the resources we have.

But we do that and maintain control by constantly looking forward and by comparing the actual results against benchmarks or KPIs which we have set, and by comparing with the same period last year. This allows us to focus the attention much more on the forecast, rather than pulling back to compare the present with a notion of where you thought you might be, months ago, when you set the budget. Back then, the world was possibly a very different place.

To report this I’m suggesting we follow a six-column layout for the part with the figures. Start with what we’re sure of:

Actual: The income and costs to date, giving an indication of just where we are at the moment

Confirmed: Contracted items which we know are going to happen sometime soon.

Beyond this we are entering the realms of speculation. This is where the transparency comes in. How do we arrive at the possible figures? To do this I’m suggesting that the possible column is split into three to give an indication of the probability of an outcome:

Highly likely: Things we are pretty sure will happen but we haven’t signed a contract yet.

Even chance: Things where there is a good chance that we will receive this income or have to spend the money.

We live in hope: The really speculative things, which a cynic might say were there to balance the budget.

Simply add up the first five columns to arrive at column six: the total forecast for the year.

So there is no annual budget, but each actual period can be compared to the same period last year or over the last number of years.

No budget, but far more control and a better understanding of where you are heading.

If there are people who think this article has raised more questions than it answers then that’s all to the good. We need to question the status quo. And loudly.

Hilary Seaward is an outsourced finance director and winner of the inaugural CFG Adrian Randall Prize, 2013

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