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October 25, 2020
Use Budgeting as a Strategic Tool
By Barb Breen

Barbara Breen
Barb Breen
The annual budgeting process provides nonprofits with more than just an opportunity to plan next year’s operations. It also lets you tie your plans to the overall strategy and position your organization for programmatic and financial success.

Rather than plunging into the budget process an organization should engage in a strategic planning/budgeting process. It’s important to first understand the organization’s strategy and what the operational plan is for the upcoming year. Doing this gets everyone on the same page before they start assigning costs.”

In-depth knowledge of policies and procedures are essential for developing a budget for nonprofit organizations, as well as adhering to best practices. We recommend the following for nonprofit organizations.

Know your goals and objectives. Lack of proper planning and goal setting may lead to poor budgeting. If managers don’t know their goals, they won’t be able to focus their activities to help the organization achieve its goals. As a consequence, the organization may budget too little or too much. Often, when people assign numbers to plans they realize that the activities may be too costly, which forces them to align activities to realistic budgets.

Create a budget toolkit. Typically your finance team would create this. It includes key assumptions and likely trends affecting the business environment during the budget’s timeframe. Ideally, it provides a budget template, perhaps in an Excel workbook. People fill in blanks and the template automatically calculates and assigns overhead and related costs. The toolkit includes written instructions and interim and final deadlines dates, indicating when deliverables are due. It also provides historical information, as well as year-to-date information.

The toolkit should also Include any projects/costs for which you have received restricted funds or grants. Aligning the look and feel of your budget template to your chart of accounts and the format of your financial statements is a great way to get everyone on the same page. Some accounting software packages allow the importing of budgets directly from Excel, so you may want to consider using a worksheet in the template that allows each budget to be automatically entered.

Get upper management buy-in. This lets them put their stamp of approval on organizational goals and operational and budget plans. Managing the staff to timelines, completeness, and accuracy keeps the budget process moving along.

De-centralize the budget process. Every manager who has responsibility for a budget should be involved in its creation. Understanding the rationale for their budget enables them to “own” it and act as stewards of their department expenses. Since they understand the cost of running their program, they also become better fundraisers.

Involve staff at other levels. Get their buy-in and delegate projects for them to plan and budget. The more they’re involved, the more they will work to help the organization succeed.

Work closely with revenue-generating staff. If you are a grants-based organization, this involves your development office. If you are a membership organization, this involves your finance department. The goal is to get people throughout the organization to look at external markets, including sources of funding and local, regional, and national economies.

Budget a surplus. To sustain itself, your organization needs to build reserves. Best practices include planning an annual surplus, even a minimal amount, to ensure adequate resources to guard against unexpected shortfalls.

Budget temporary and permanently restricted revenue. Even though they don’t affect your unrestricted column on your statement of activities, they will affect your final surplus/deficit result, and provide revenue goals and results for fundraising for future years.

Budget capital expenditures. Even though they don’t affect your income statement, capital expenses will increase your budgeted depreciation expense, overall expenses, and needed operating revenue, and therefore increase your cash flow and cash outlays.

Manage to your operating budget and your audited financial statements. Don’t forget to budget those non-cash expenses. The budget process should bridge the cash budget, which most often is a modified cash-basis budget, and audited statements, which are accrual based.

Frequently, management and the board look at cash budgets. Outsiders, including lenders, look at audited statements which can give a very different picture. For example, depreciation expenses and vacation accruals can turn a $10,000 surplus on an operating budget into a $50,000 loss on an audited statement of activities.

Project cash flow. Good business practice indicates that an organization should have three to six months of current assets (cash, accounts receivable, short term investments, etc.) on hand. This will ensure you have enough cash to meet your obligations throughout the year. It will help you manage your accounts receivable and accounts payable. And it will let you manage the timing of budgeted expenditures.

Have approved board-of-director budget policies. These include who presents, when they present, and what format they present the organization’s budget to the board of directors for approval. It provides guidelines on how changes to the budget are made and approved, how expenditures that exceed budgeted amounts are approved, and a monthly review of actual versus budget reports and cash flow projections.

Build a flex budget. This says that if the organization reaches certain financial goals during the year, it can do more. In addition to providing a financial management and motivational tool, it gives the board a yardstick for gauging success and a level of comfort that the organization won’t risk financial operations to reach stretch goals.

Don’t stop. The budget process is not a once-a-year activity. It’s ongoing. Your chief financial manager should meet with line managers once a month to review actual versus budget performance and plan for the rest of the year. Some organizations even re-budget mid year if there are substantial operational changes.

Barb Breen, director of the Nonprofit Practice at Accounting Management Solutions, Inc., works with nonprofits on a full range of accounting and financial management issues. Call her at 781-419-9221 or email to
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