One of the biggest challenges for nonprofit organizations is sustainability. Staying afloat during uncertain times can be especially tough without a proper financial plan in place. A carefully planned budget can help NPO’s maintain and improve their operations and even refocus their goals and objectives when challenges arise. Think of a budget as a roadmap that will guide your decisions on how to best use your resources to fulfill your organization’s mission through the upcoming fiscal year. In this blog, we outline 5 best practices on how to get started on your organization’s budget.
1. Enlist the right people for the job
Working with the right people to develop the budget is crucial. Depending on the size of the organization, budget creation may fall under one person, such as the Executive Director, while other organizations will involve multiple players and may also have a Board budget committee. Regardless, the first step should be discussing with the board the organization’s priorities for the upcoming fiscal year. This will help you determine who should be involved in developing the budget.
Internal team members involved in the budgeting process will have an intimate knowledge of the organization’s programs, revenue sources, and operations. If you have a budget committee, be sure the members understand the nonprofit’s history, interests, and goals, as well as the basics of budgeting. Developing a framework will help keep the budget process realistic, rather than excessively idealistic, and ensure that all members of the budgeting team are able to hit the ground running.
2. Gather all the information you need
Now that you have the right people lined up to help you create a budget, the next step is to gather the data you will need to support your budgetary decisions. This will allow you to strategically plan a budget that realistically aligns with the organization’s needs and the goals of the nonprofit’s leadership. There are several pieces of financial information that can help guide a nonprofit through the budgeting process:
- Current and previous fiscal year budgets
- Budget to actual results for the previous and current fiscal year
- Current fiscal year-end forecast
- Information regarding significant changes to current operations expected in the new fiscal year
- Revenue and expense projections for new initiatives and funding sources that will occur in the new fiscal year
- If budgeting on an accrual basis, be sure to understand transactions that may have cash implications in previous or later fiscal years (i.e., deferred revenue, accrued expenses, prepaid expenses)
- Often it is recommended that accrual-based NPO’s prepare an annual cash-flow projection to accompany its annual budget
With this information, you and your team can consider the past and look to the future in a meaningful way. Reviewing this information at least annually is also a helpful exercise to determine which previous budgeting strategies were most accurate and effective.
3. Budget realistically, yet carefully
In a perfect world, the budget you create will be implemented exactly as planned, there will be no unexpected challenges, and you will end your year in the black rather than the red. Best practices include budgeting realistically and planning for the unplanned. Nonprofit leaders understand that events may occur that are outside of their control and outside of what can be reasonably predicted. You know better than anyone else how certain your revenue streams are, and what control you have over your expenses. By budgeting realistically and carefully, you will give your nonprofit the best chance to overcome hurdles and continue operating in the face of setbacks.
4. Give the budgeting process enough time.
How long do you think it takes to create an effective budget from start to finish? Chances are, you will need more time than you think—be sure to give the budgeting process as much time as is necessary to do the job well. Even after a budget is drafted, the budget committee or other applicable committees or stakeholders will need to review the draft to ensure consistency with the values, missions, and goals of the organization. You will also need to plan for final approval by your Board, which should happen prior to the start of the new fiscal year. For many nonprofits, 4-6 months is enough time to create the budget, from its planning stages to final approval. It is prudent, however, to critically consider how much time will be required to build your budget and have it approved, keeping in mind factors such as accessibility of nonprofit leadership and other possible barriers to your budgeting process.
5. Manage the budget effectively
Once the budget is approved, it should be monitored continuously. Monthly financials should include a budget to actual Statement of Activities, and variances should be reviewed and understood. A nonprofit must be nimble and able to adjust the budget as circumstances change. An Executive Director or CEO should have the authority to move or adjust budgeted funds strategically across expense lines, within specified parameters, to meet the goals of the organization. More significant changes to the budget should involve the Finance Committee or Board. When a budget is prepared, it is important for leadership to understand which revenue and expense lines may afford some flexibility and where there is little opportunity for adjustment.
Your accounting and finance team should compile the financial information needed to begin preparing your organization’s budget. If you are not getting the necessary data, or if your in-house team could use some assistance with the budgeting process, Chazin & Company is available to help. Ready to take your NPO’s budgeting and accounting to the next level? Schedule your complimentary consultation.