While budgeting is generally not high on the nonprofit organization’s list of “favorites,” having an effective budgeting process truly can make or break an organization. The elements of a solid nonprofit budget are key to ensuring financial sustainability to help an organization allocate resources effectively and fulfill its mission. Below, we set forth the steps nonprofit organizations can take to build a functional budget.
Always Start With the Mission
The best budgets start with a clear understanding of a company’s core mission and short-term and long-term goals. This thought process can align budget and financial decisions with the overall direction of the organization. Utilizing this mission road map to prioritize programs and initiatives can allow the budget to serve as a forecasting tool for achieving meaningful impact.
Having the mission and short- and long-term goals of the company as a guide will also allow for flexibility in the budget. Organizations should view the budget as a dynamic tool as opposed to something set in stone. Changes in the economy or industry may require an adjustment to the budget.
Review Revenue Independently
As budgets are created during the year, remember the organization’s nonprofit status is a tax status, meaning organizations can still budget for a positive net revenue. Anytime revenue exceeds expenses for the year, the organization can invest in its ability to fulfill its mission in the future.
It’s important to create a realistic revenue budget independently of the expense budget to avoid inadvertently allowing the expenses to influence revenue decisions. Review funding history, including donations, grants, sponsorships, or program income to determine which sources can be repeated for the budget year, what areas have room for growth, and where diversification is needed.
Review Expenses Independently
For expenses, budgeting by department may help break down the budget into manageable pieces. Work with the heads of each department to analyze expense history, review contracts for any automatic expense increases, and evaluate the strategic plan for any added expenses to include.
In general, there are two types of expenses organizations should consider when creating the budget, fixed and variable. Fixed expenses do not increase or decrease based on the programs the organization provides. These are set costs like headquarters rent, insurance, and administrative salaries. Variable expenses will fluctuate based on programs and decisions the organization makes. These expenses can include, program staff, professional fees, and supplies. Organizations must consider if programs are being added or removed when budgeting for variable expenses and adjust accordingly.
Align Revenue & Expenses
Having independent and realistic revenue and expense budgets may help the organization make informed decisions on inserting stretch goals for revenue or curbing expenses. Once everything is put together, this can create an effective road map for the organization and allow for the complete budget to be analyzed. During this time, it is important to remember, that the budget is a dynamic tool created to be adjusted to fit the organization’s goals and realistic capacity.
Review & Reinforce
It is important to have board buy-in and approval on the final budget. This allows for organizational transparency and for board members to maintain their fiduciary responsibility. Once reviewed and approved, the budget is ready to be implemented! At this point it should be distributed back to the budget owners and inserted into any tracking system that is maintained.
Periodically, management should set up time to compare actual results to the budget and note any variances. In addition, the organization has created a well thought out budget and needs to know why the variances exist. Dig into the story behind any significant variances to truly understand what is going on. The story will help determine if the variance is due to an added transaction not originally included, timing of the transaction is off from the expectation, or if there is an issue that needs to be addressed. This variance analysis will help the organization adjust the current year's budget and account for any changes in the next year’s budget.
The budget is a powerful guide to allocating resources to fulfill the short- and long-term goals of the organization. Preparing the budget in small chunks, reviewing the budget on a consistent basis, and building a budgeting process will help set the organization up to effectively utilize resources to fulfill the mission.
If you have any questions or need assistance, reach out to a professional at Forvis Mazars.