What if you are implementing your grant and realize that you have made a mistake in your budget? What if your project budget doesn’t include everything you need?
Four reasons why your project budget may not work
There are several reasons why your budget could be ‘all wrong’ by the time you are implementing your hard-won project.
- For instance, in the time between submitting your proposal and grant approval, the situation in the field may have changed. Maybe you need to adjust your activities because of these changes – leading to different costs than planned.
- It is also possible that your vendors have raised their prices, as a result of inflation, sanctions or otherwise.
- Or perhaps you have received a grant in a foreign currency, and maybe the exchange rate has changed. So that now your grant amount is worth less in local currency than at the time of budgeting.
- And finally, it is also possible that you simply forgot to include some budget items.
What to do when you see your project budget doesn’t include everything you need?
Each scenario calls for different steps to take. And you can also do some things to avoid these scenarios or to mitigate the impact of any of them happening. Let’s have a look.
The situation on the ground has changed
I don’t think there are many (if any at all) nonprofits that do not have experience with changed circumstances. Those that were lucky enough to work in stable environments without such challenges, now have this experience, too, due to COVID-19.
If the situation changes so much that the planned activities and the planned approach to the project can no longer work, you need to reach out to your donor. You need to make a plan how you may still achieve the objective and planned project results, including a revised budget. And you need to discuss with the donor if they can agree to a new way of doing things and a rearranged budget.
There is a significant price increase
If you need to cut down on numbers of participants or outputs to be created due to a significant price increase for goods and services that you need to implement the activities, you need to reach out to your donor.
But first you have to prepare clear calculations of the impact of the price increases. You need to see if you can reorganize the budget to serve the same number of participants. And you need to discuss with the donor if they can agree.
The exchange rate of the grant currency has changed drastically
If your grant is in a foreign currency, the exchange rate may change during the project implementation period. In fact, it could already be different at the start of the project implementation compared to what it was when you were budgeting. The change can lead to the total amount being more in local currency than planned or less than planned.
If a change in exchange rate leads to a significantly lower amount in local currency than foreseen at the time of submitting the grant proposal, you can discuss with the donor about possible adjustments in your implementation plan. Very often, though, there is not much that can be done. It is considered a risk that you take when accepting a grant in foreign currency.
Please note that some donors will stipulate in the grant agreement that an exchange rate gain needs to be invested back into the project, while losses are the risk of the grantee.
Oopsie, we forgot to include something
It is of course also possible that you simply did not think of including a cost item in your budget. In that case, you need to see how you can accommodate this expense within your total budget. Can you cut some other costs without impacting the achievement of targets and goals? Make a plan, including a revised budget, and discuss with your donor if they can agree to this.
How to avoid or mitigate risks?
Even though challenges with budgets can be caused by external factors there are some things you can do to avoid them or to mitigate their impact.
This is important because although donors can often be flexible in accepting well-thought-through budget changes, the overall budget amount can almost never be adjusted. And the planned objective and results are also mostly not negotiable. That means that your budget change is a shift of budget from one budget line to another. While you still need to achieve what you promised in the proposal.
To mitigate the impact of challenges you can:
- Include a budget line unforeseen in your project budget. Usually this is allowed as a percentage of the total activity costs, mostly for around 10%. Depending on the rules of the donor, you can use this budget to cover the extra costs of challenges.
- Make a good analysis of the exchange rate in the past year. Use a careful rate when budgeting in a foreign currency. Ask your donor for their rules around currency exchange rate fluctuations and ask to make necessary adjustments before the grant agreement is finalized.
- Develop scenarios for external developments, like natural disasters, conflict and war, inflation, etc. while you are designing your project proposal. Discuss with the team which scenarios need to be considered when planning and budgeting for activities.
- When budgeting, keep in mind that it is quite normal that prices and salaries will increase at least a bit year by year.
To minimize the chance of a mistake, I recommend visualizing all activities you want to implement. If you do that carefully, you don’t miss any element in your budget.
My key tips
- Create flexibility in your project budget, by including an unforeseen budget line if you can.
- Make sure your team learns from mistakes and misjudgments and sees that as a positive contribution to better proposals and budgets in future.
- Be really realistic when designing your project. Don’t promise the moon if you are not 1000% sure you can reach there.
- Pro tip: Create a reserve on your balance sheet that can absorb exchange rate fluctuations.
Want to know more and ask questions?
Read about a good project budget here. And read about exchange rates here.
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