The Budgeting Process
Posted on Wednesday, February 27, 2013
All nonprofit organizations should have a budget that identifies the expected revenue and expenses for the upcoming year. A budget is a plan that allows the organization to determine where its resources are coming from and what those resources are used for.
Budgets are usually divided between income that is earned, called revenue, and income that is contributed, called support. Expenses are normally divided between those relating to personnel, overhead expenses, fund raising expenses and program specific expenses. Budget line items should be matched with the organization’s chart of accounts to allow easier matching of actual income and expenses against budgeted amounts. Noncash items such as depreciation and in-kind contributions should also be included in the budget; however, not all nonprofits include these. Budgeting for depreciation allows the organization to provide cash needed to replace depleted assets. Including in-kind contributions and offsetting expenses gives a more realistic picture of the total resources needed to operate the organization.
Often times the budget is created by looking at what has happened in the previous year and adjusting those balances for what is expected to happen in the future. Are there any programs that will be cut in the coming year? Are there new programs that the organization is going to take on? Has the organization lost any of its funding sources or are there new funding sources? How many individuals are expected to be served during the year? Management needs to ask itself what will be different in the upcoming year from the previous year and adjust the budget accordingly for these changes. In order to remember what assumptions were made during the budgeting process, any notes in regard to estimates should be kept by management for future reference.
Most organizations try to prepare a balanced budget where income equals expenses. Sometimes a balanced budget is not appropriate. Healthy organizations require cash reserves. Sometimes an organization will need to increase its cash reserves or need additional cash to pay down debt. In these instances, the organization may plan to generate more income than expenses, creating a surplus. Other times, the organization may feel that its reserves are more than sufficient and decide to invest extra funding in new programming or give out one-time pay raises to employees. In instances of a deficit budget, when expenses exceed income, it is important to make sure that the deficit was expected and not just an error in budgeting.
Once the budget is prepared, it should be approved by the board of directors prior to the start of the fiscal year. When a board approves a budget, it is really approving the use of resources for specific purposes. After the budget is approved, the board should continue to make use of the budget by comparing actual results to budgeted amounts on a regular basis to ensure spending is in line with the approved plan.
A budget is much more than a list of income and expenses. It’s a financial tool that should be utilized throughout the year as a guide for ensuring that an organization’s mission is accomplished.
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
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