Do You Have The Right Type of Budget For Your Nonprofit?

Amanda Lane, Tax Manager at TD&T CPAs and Advisors, P.C., provides an overview of budgeting for non-profit organizations in this quarter’s newsletter.  Amanda serves social service organizations, colleges and universities, membership organizations and many others throughout Iowa.

Budget Planning Starts with Knowing Yourself and Your Organization

More clearly, you need an objective understanding of your organization in order to have a budgeting plan and process that works well for you. Effective budget planning for a non-profit organization (NPO) or any business begins with business planning.  You need clearly defined goals and strategies for achieving those goals if you want to develop a successful budgeting approach and plan.  Financial management can enable you to achieve and exceed your goals, but poor financial management can prevent you from reaching your highest potential.  The budget is a planning tool to help carry out the NPO’s purpose.  Not understanding the budget means not understanding the organization’s goals.

 

Let’s Examine the Key Factors that Influence Budgeting:

The factors that influence budgeting are classified into three general areas:

  • Importance of Financial Management in a Nonprofit Organization
  • Budgeting Fundamentals
  • Engaging Non-Financial People in Financial Matters

 

Importance of Financial Management

Most board members who join a non-profit organization bring with them specific abilities and talents that are relevant to the organization’s business or mission.  While they may have high skills levels in those specializations, most of them likely do not have a lot of training and experience working with financial data.  Helping board members understand the financial workings of the organization will help them further contribute to evaluating the budget.  All stakeholders should be passionate about the mission and proud of the business.  Remember that “non-profit” is a tax status, not a business model.

 

NPOs Sometimes Skimp on Staff Positions

While NPOs depend on contributions and other forms of income to support their operations, the myth of staff as “overhead” tends to keep staff positions a bit too tight.  Many NPOs have not staffed their finance function adequately or have assigned the function as an added duty for someone already wearing multiple “hats.”  The three key parts within the finance function are clerical tasks, accounting tasks and strategic analysis.  As the organization grows and receives more varied and complicated revenue sources additional staff should be hired with the appropriate experience needed to support the organization.

 

Budgets Provide More than the Obvious Benefits

Budgets are important for many reasons beyond sound financial management:

  • Accountability and transparency – Especially in a non-profit, where the organization depends on outside financial support, sound management requires transparency. No organization wants to see their name in the headlines about inappropriate financial management.  Good financial diligence helps maintain a good reputation.
  • Focus on strategic goals – Because few organizations can boast about unlimited budgets, budgets help focus strategic decision-making with regard to the use of financial resources.
  • Financial controls – Budgets set limits and guidelines to keep spending within reasonable boundaries. The non-financial people who actually deliver the services of the organization benefit from clearly stated and managed controls to assure they can continue to deliver those services.
  • Board oversight –The financial management process provides transparency to board members and offers a measurement system for their use in assessing the organization’s health and effectiveness. It also gives them a point of reference for making recommendations and suggestions to the management team.

 

Types of Budgets

Most NPOs use one of the following types of budgets:

  • Incremental budgets
  • Zero-based budgets

Let’s look at the benefits and limitations of each.

Incremental Budgets:

  • Based on history; they start with last year’s budget and build upon it, as needed.
  • Tend to be “use it or lose it” budgets; unspent funds from last year get reallocated to another department or deleted from the overall budget entirely.
  • Maintain the status quo – they have a tendency to perpetuate both good and bad practices, depending on the individual department’s budget stewardship.
  • Status quo nature may make it harder to find funding for new projects or departments.

 

Zero-Based Budgets:

  • The process starts at zero for each budgeting period, usually a year. It requires each department or entity to outline every business expense for the year, line-by-line.
  • It may challenge previously accepted assumptions, forcing the organization to take a fresh look at all of the organization’s operations.
  • The zero-based process works best when paired with a business plan that relates each part of the budget to the business plan, showing how it supports the organization’s overall mission.
  • Budget allotments from previous periods or years may provide rationale for the amounts requested, but the budget owners usually need to also relate the investment to results.
  • While this approach may seem logical and superior, it requires a lot of time on the part of the department leaders and their staffs to develop the proposals for the new budget. In some cases, it may take away that time from implementation of the organization’s mission.

 

Can You Get the Best of Both?

Yes! Some organizations succeed with a combination of incremental and zero-based approaches.  Even with an incremental approach, the organization may require a fresh look at all expenses before automatically re-casting the budget based on history.  Some organizations may apply zero-based budgeting to specific functions or only to new projects, while maintaining an ongoing budget for base operations with an incremental funding approach.

 

Other Budget Types

Some people assume that NPOs must balance expenses with income in every year.  There are budget techniques that permit management of funds beyond a current budget period. Both incremental and zero-based budgets can exhibit some of the following characteristics:

  • Surplus budget – Simply stated, at the end of the budget cycle, the organization has money left over. Some organizations plan for this to prepare for debt retirement, future planned operations or anticipated variation in the amount of income in future budgeting periods.
  • Break-even budget – The initial budget projection shows the potential for a shortfall in funding. Management adopts the budget and places extra emphasis on increasing funding to avoid having to cut out line items.
  • Most organizations do not operate from a deficit budget, where expenses exceed income. A major expense such as an expansion project or a renovation may provide a reason for a deficit budget for a year or two. Planned deficits are investments for the benefit of the organization and its constituents.
  • “Known” and “What if” Budgeting – Some management teams facing uncertain conditions for the coming budget period may identify known expenses or risks and budget for them. In addition, they may anticipate conditions that could result in additional expenses or revenue sources and may add contingencies into the budget to plan for those kinds of conditions.

 

Plan Your Work and Work Your Plan

The best financial managers use all of these techniques to craft the best plan for their organizations, starting with the mission and building a budget that supports achievement of that mission.  Part of that role includes educating all members of the organization that their decisions can influence budget performance and the consequences of their actions can affect their own situations.

Success requires clear understanding on the part of everyone.  For the people responsible for the budget, these communication guidelines may help:

  • Use terminology that’s easy to understand – Forget the financial terms and use everyday language whenever possible. If you must use financial terminology, don’t think that explaining it once will suffice for all time.  Remind people of the meaning of the terms whenever you communicate with them as well as identifying the main ideas and concepts to help them further understand.
  • Figure out how to be helpful to people in their jobs – Regardless of the organization, most people start from the same point of view: “What’s in it for me?” If you can understand their needs and concerns, you’ll be able to do a better job of communicating in a way that they find meaningful.
  • Use images and words in addition to numbers – Math is intimidating to many, while others want the detail and will feel slighted if you only provide the big picture. Most audiences will include both kinds of people.  Try to anticipate this by thinking about the ways in which they might receive the message you intend to provide.  Be as creative as you can in making your message less dry and more compelling.

 

Three Key Points to Remember

  • Financial management is crucial – Carrying out the mission depends on it. Good planning can help achieve success, while poor planning can prevent success.
  • Budgeting is a tool – Use it to make the organization’s dreams come true.
  • Everyone can understand the numbers – But to reach everyone, recognize that you need more than numbers for the full organization. Get creative with your delivery.
By | 2017-07-07T15:49:41+00:00 May 4th, 2017|Budget, Goals, Nonprofit, Saving|

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