A budget is a planning tool that reflects an organization’s programs, mission and strategic plan. The process should begin at least three, maybe even four months before the end of your nonprofit’s fiscal year — you need enough time for the budget to be approved by the board of directors. A budget identifies the financial resources required to achieve programming and financial goals. The plan it represents assists the board in managing the organization and establishing a schedule for key actions and decisions. You’ll have adequate time to gather the data for decision-making because you’ve done some advance planning.
The annual budget process should begin with the question “What financial outcomes does our organization want or need this year?” Different scenarios lead to different decisions about what the budget’s bottom line should look like.
So what’s a good way to approach the task? Here’s a budget checklist:
- Determine a timeline and set a target date for board approval.
- Allow time for each step, without skimping on review and discussion.
- Agree on goals by prioritizing program objectives and when they should occur.
- Understand your current financial status by reviewing actual income and expenses versus what you budgeted last year, and then analyze why there were variances.
- Agree on a budget approach and then assign roles and responsibilities: who has the authority to make decisions and how many unknowns can be included?
- Develop a draft budget with costs to reach program and organizational goals, projecting income based on current fundraising and revenue activities.
- Review and discuss all assumptions, make adjustments and come up with a final draft, which also is thoroughly reviewed.
- Present the budget to any committees as needed and then to the board of directors.
- Create a consolidated budget spreadsheet, writing all assumptions.
- Implement the budget by assigning management responsibilities, incorporating it into your accounting system and monitoring/responding to changes as needed.
Who deals with creating a budget? Staff is initially responsible. Board members — the finance and/or executive committee — review the proposed budget and the board usually adopts it at the full board meeting. Once approved, the budget serves as a guide for financial activity in the months ahead. It’s clear that your financial position may change during the year, so it’s common to periodically review to compare actual cash flow to expenses and see if they’re playing out as expected during the year. After all, budgets may be needed when you sit down with banks, donors, and grant-makers.
In fact, the executive director has to be ever mindful of essential nonprofit business concepts and realities. Strong annual budgets work through careful alignment with the annual plan. If your budget includes as-yet-unidentified income, which is standard for many nonprofits, the predicted-but-not-there-yet amount should be clear to all board members and staff, along with plans to raise the funds during the year.
Budgets serve several key purposes
It’s critical to emphasize to your staff that an annual budget is a blueprint for reaching a net financial result, and it will yield a specific surplus or can be used to invest a specific amount of the monetary reserves through a planned deficit. If your nonprofit is not running on pace to achieve budgeted financial results, you’ve got to question budgeted expenses and do a lot of reconsidering. Budgets are never permission to spend when income doesn’t exist.
Approval of the annual budget is one of the fundamental building blocks of sound financial management. Remember: A break-even budget is not mandatory. One of the reasons executives struggle to discontinue the break-even habit is that foundation grants and government agreements are typically break-even contracts, proving your organization spent exactly what it raised. But while grants and contracts are designed to break even, organizations are not. Healthy nonprofits require cash reserves, meaning they should generate excess cash in at least some years.
An executive director can transform the annual budget analysis and decide whether income diversification is the way to go, how to achieve a robust reserve and how to equip the board for effective financial governance. A key component of financial sustainability is the commitment of board and staff to financial management that includes timely review of financial reports and advance planning.
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