Thursday, May 5, 2011

It's Budget Time!

Thursday, May 5, 2011
Many nonprofit organizations are in the process of preparing their budgets for the upcoming fiscal year. A well-prepared, well thought out budget is an Important and useful management and Board oversight tool. It helps an organization’s management and its Board effectively analyze revenue and expenses throughout the year to monitor how the organization is doing. Simply comparing current year revenue and expenses to prior year revenue and expenses may not be useful if there are expected changes in the organization’s activities from one year to the next.

Budgeting methods range from baseline budgeting, which uses the current year’s revenue and expense information as a “base” or starting point; to zero-based budgeting, which starts with a “clean sheet of paper”; to a combination of baseline and zero-based budgeting. Whatever budgeting method is used, an effective budget generally has the following qualities:

• Realistic – The budget should present a reasonable estimate of revenue the organization expects to raise in the coming year. Expenses should realistically reflect the cost of the upcoming year’s activities and programs; and should be consistent with revenue estimates.

• Consistent – Budget should be consistent with the organization’s mission and long-term objectives.

• Flexible – Budgets are based on assumptions and must be monitored and possibly amended if major changes occur, such as short-falls in funding or changes in program activities.

• Appropriately Descriptive – The budget should be formatted using the same account detail as the general ledger to streamline the "budget to actual" review process.

The budget process should be a team effort, involving appropriate members of management and the Board, and should be broken down into the following steps:

• Determine programs and activities for the coming year – Important first step! Management needs to decide if programs should be added or expanded, eliminated or scaled back.

• Budget expenses and revenues – This is the most difficult and time-consuming step. Each program should be budgeted separately to the extent possible, using assumption lists to keep track of assumptions used in the budget process. Using linked spreadsheets with formulas is a useful tool. Also, do not utilize every dollar; leave some unallocated revenue for contingencies!

• Assemble draft budget document – To ease the review and approval process and decrease the number of questions, include the prior year’s budget and actual along with the current year budget and budget narrative (assumptions).

• Review draft budget and modify as necessary – The Finance committee usually reviews the budget with management and recommends modifications before a final draft is presented to the Board for approval.

• Present draft budget for Board approval – Once passed by the Board, the budget becomes the final budget for the coming year.

• Monitor budget versus actual throughout year – Approved budget should be entered into the organization’s accounting system in order to effectively and efficiently monitor activity throughout the year. Budget versus actual reports should be reviewed by the Board monthly, or at least quarterly, in order to make any necessary modifications.

How the budget process gets implemented will depend on the size and structure of the organization. It’s an important process that should be given the attention it deserves, and should never be rushed. Budgets should be complete, accurate and current. They should be flexible and have contingency plans for when things don’t go as planned or when things go better than planned. This is good management and good stewardship of supporters’ funds. To learn more about nonprofit budgeting, or to obtain assistance and guidance with your nonprofit budget process, contact Elko & Associates Ltd.


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