Refresh Your Organization’s Budgeting Process: Getting Tactical
October 17, 2012
In my previous post, I provided an overview of the strategic steps organizations should take in preparing a budget. Now, let's get tactical with some tips for assembling a sound, strategic and manageable budget.
Budget for unrestricted surpluses. While
we encourage organizations to be conservative in their budgeting, aim for
finishing the coming year in the black. Budgeting for breakeven leaves little room for
chance, when we know that each year brings unforeseen circumstances. Planning
for a surplus allows for some margin for error. Be sure to include depreciation
in your expenses even though it is a non-cash expense. Aiming to cover
depreciation in your budget can contribute to a cash surplus that can be saved
for future use to pay for replacement or repair of depreciated assets. Lastly,
make sure to include only unrestricted
revenue (and/or revenue that will become unrestricted in the next year) to
cover operating expenses.
Don’t plug revenue with mystery funds. Build
your budget with revenue that is already committed or has a high likelihood of
materializing based on past performance or known new relationships. Developing
a separate pipeline of additional fundraising prospects and revenue
opportunities keeps less secure funds from de-stabilizing your budget, while
still recognizing the value of new leads.
Distinguish operating revenue from capital. Funds
that are earmarked for capital purposes like facilities, endowments, or growth,
should be pulled below the “surplus /deficit” line (or reflected separately in
a capital budget) to provide a clear view of operating performance. Conflating
capital dollars for episodic purposes with the regular revenue that reliably
covers ongoing expenses can mask the true financial performance of your
organization. See NFF’s Financial Reporting Done Right
publication for more information and suggested examples for presentation.
Consider the balance sheet. The balance
sheet provides a window into resources available to be used for a rainy day,
pursue a new strategy, or adapt to changes in the environment. Nonprofits have expenditures
and savings needs that go beyond the direct and indirect expenses that appear
on their income statements. Setting annual revenue targets high enough so that your
organization can repay debt principal on schedule, address the wear and tear on
fixed assets, and/or add to reserves ensures that the budget is investing in
the longer-term resource needs of the organization. Our Financial
SCANtool can illustrate your
organization’s estimated full costs and reveal balance sheet trends in its multi-year
dashboard and graphs.
Plan opportunities to compare actuals to
budget and then re-forecast. Fundamentally, a budget is just a plan. And
all too often, circumstances don’t go exactly according to plan, so expect your
budget to change. NFF suggests reforecasting your organization’s budget at
least once a quarter based on actual performance to date and newly available
information. Ensure that a process is in place for how re-forecasts will be
conducted and clearly communicated to staff and the board.
management not budgets drive financial performance. Even the best budget and reforecast will only
get you so far. Financial plans are meaningless if the leadership and
discipline aren’t in place to take action when performance setbacks occur. Many organizations find it helpful to develop
and share with leadership a set of financial “triggers” – events (e.g., (the
loss of a major donor) that will provoke a set of pre-determined decisions
(e.g., a particular expense reduction) if circumstances go awry.
At the end of the day, strong programs depend on strong
finances that ensure your organization can pay for the people, infrastructure
and activities supporting mission execution. Developing a financial roadmap,
backed by decisive leadership, can help ensure that your organization can advance
its mission next year – and in the many years to come.
What budgeting tips
have you employed to improve your annual plan? We encourage you to share your
additional tips below.