Many nonprofit managers regard budgeting as a necessary evil that must be done to satisfy the board of directors and funders.
In addition to the chore of gathering the financial data, there is often an uneasy feeling triggered by forecasting the unknown. What happens if you don’t achieve the needed revenue figures?
Instead, try to consider budgeting as an informative process that will help you reach goals, solve problems before they occur, and make important decisions.
Learn from the past
Before gazing into the future, gather the last three years of profit and loss statements, ideally with budget comparisons. The goal is to discover trends, patterns and problem areas in both revenue and expense items.
Examine each line item. Has it gone up or down over the three years? Some expense categories will likely show a steady increase as prices rise. Those expenses can be easily budgeted with a percentage uptick.
What you’re looking for are the trends and anomalies. Are revenues from a certain event declining steadily? Perhaps it’s time to either revamp or stop holding it.
Do payrolls end up higher than budgeted because you’re overly optimistic about workloads and staff capacity? Note that.
This review will reveal both circumstances affecting your organization and blind spot areas in your budget process.
Set your course
Your organization can really benefit from tying the budget process to your strategic and action plans.
Many just look at the budget as a whole – a big pot that will somehow cover every department or project, regardless of performance. Ideally, staff should meet before the new fiscal year begins and talk about each program and the goals. It’s important for each staff member to understand the revenues and costs associated with their areas of responsibility.
Example: a children’s meal program that costs $250 per year per child. The cost was determined by the accountant and should be reviewed periodically to ensure accuracy.
While discussing goals for the meal program, perhaps 100 more needy children have been identified, costing the organization $25,000. The manager may say that no additional staff will be required, however enthusiastic growth without consideration of staff workload is a common pitfall.
Next should come an examination of the revenue sources for the program to determine shortfall or excess. If additional funds are needed, staff should be engaged in ideas on how to make that happen, as well as the likelihood of reaching the goal.
The end result of the planning session should be concrete performance goals and an understanding of the associated costs and revenue needs for each program, project and department.
Staff members who actively participate in setting and managing the budgets under their control do a better job of controlling expenses. In fact, their input and commitment to reducing the cost of overhead expenses can also help the organization run leaner and more efficiently.
NOTE: Don’t be a paperclip manager. These are managers who are uncomfortable with a hard look at the big items so tell their staff to watch consumption of office supplies in response to financial challenges. Unless you run a printing press, paper and ink costs won’t sink a healthy ship or save a sinking one.
Fine tune your expenses
The budgeting process is an ideal time to review your ongoing costs such as insurance, utility use and other regular vendors.
Over time, pricing increases can sneak up on you. This is also an opportunity to review business-as-usual habits – like buying boxes of business cards for employees who rarely meet the public. Marketing materials are expensive. Take a hard look at what is most effective and decide whether to print another 5,000 brochures. We live in a digital age when that might no longer be necessary.
In tandem with whittling away discretionary expenses, be sure to budget for a capital reserve fund and emergency fund. What happens if the furnace dies in the middle of winter? It’s no fun scrambling when you have to.
Create your budget
Now that you’ve set your goals, gathered data and gotten new quotes, you’re ready to prepare the budget. Start with expenses and revenues. Through the goal-setting process, you identified revenue dollars needed to cover programmatic goals. Now you need to decide where those gap monies will come from.
Will you hold another appeal, create an event, or seek grant funding? It’s a rare nonprofit that has all revenue sources nailed down before the fiscal year starts. Knowing how, when, and where you will raise funding is a great start.
Once the budget is approved, keep a close eye on expenditures and cash flow every month so you can make course corrections. Stage growth by matching revenues and associated expenses to help you maintain your organization’s financial health.
Need assistance with the preparation of your nonprofit’s budget? Davis and Hodgdon Associates CPAs has been assisting nonprofits, individuals and businesses with tax and accounting services in the Burlington Vermont Metro area for more than 20 years. If you have any questions or concerns please feel free to call 802.878.1963 or email [email protected].