By VonLehman staff
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 financial data, there is often an uneasy feeling triggered by
forecasting the unknown. What will happen if you don’t achieve the needed
revenue figures?
But there is another way
to look at the process: 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 looking to 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,
both in revenue and expense items. Examine each line item. Has it gone up or
down over the three years? Of course, 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. For example, are revenues from a certain event
declining steadily? Perhaps it’s time to either revamp the fundraiser or stop
holding it.
Do payrolls end up
higher than budgeted because you’re overly optimistic about workloads and staff
capacity? Note that.
An in-depth review will
both reveal circumstances affecting your organization and blind-spot areas in
your budget process.
Set your course
If there is one step
many organizations can benefit from, it’s tying the budgeting process more closely to 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 program and project goals. It’s also
important for each staff person to have an understanding of the revenues and costs
associated with their areas of responsibility.
Take for example a meal
program for children that costs $250 annually per child. The original cost was
determined by the accountant, but should be reviewed periodically to ensure
that it is accurate. While discussing goals for the meal program, perhaps 100
more needy children have been identified. This will cost the organization an
additional $25,000. The manager may say additional children can be handled
without adding staff, but enthusiastic growth without considering 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 expenditures. In fact, their input and commitment
to reducing the cost of overhead expenses can also help the organization run
leaner and more efficiently.
One caveat: 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
and plan for the unexpected
The budgeting process is
an ideal time to review some of 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, too, are frequently expensive. Taking a hard look at what
is most effective will help you decide whether or not to print another 5,000
brochures.
In tandem with whittling
away discretionary expenses, be sure to budget for a capital reserve fund and
emergency funds. What happens if the furnace dies in the middle of winter, for
example? It’s no fun scrambling for dollars in an emergency situation.
Create your budget
Now that you’ve set
goals, gathered data and gotten new quotes, you’re ready to prepare the budget.
Start with the basis of
what you absolutely know – expenses and revenues.
Through the goal-setting
process, you identified revenue dollars needed to cover program goals. Now you
need to decide where those gap monies will come from.
This is also a good time
to discuss if the organization will 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.
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