If you haven’t already started the year-end planning process for your organization, now is the time! December is the time to think about W-2s, 1099s, donor acknowledgement letters and any final health insurance policy changes to comply with the new Affordable Care Act. For calendar-year organizations, you’re likely dealing with employee evaluations and compensation adjustments, closing the books, strategic planning and budgeting as well. The budgeting process can be daunting and time-consuming. It often feels like an iterative series of small tweaks that, by the time you’re done, is already outdated based on new facts. If you’re interested in completely re-inventing your budget process, we recommend you read this article from the Journal of Accountancy discussing the merits of a 15-month rolling budget. It’s a great idea for creating budgets that have more relevance for an organization and take less overall time once the process is in place. However, we understand that grant requirements and other restrictions beyond the control of some nonprofits prevents them from venturing far beyond the traditional budgeting process at this point, so we’ll focus on some tips for traditional, annual nonprofit budgeting.
- Involve a comprehensive group. Of course program directors, accounting directors and management are involved, but consider including other key staff in the process to give them a sense of ownership. People who are involved in a process typically understand more about why certain sacrifices must be made and why funds are allocated in a way that may not otherwise be obvious. Staff who are responsible for fundraising or other key functions of the organization need to feel like their opinions are heard, and they often have useful insights into how funding or expenditures need to be allocated based on trends they’ve seen. Each person involved in the budget process needs to understand how the various programs work together to accomplish the strategic plan for the organization; they shouldn’t see each other as adversaries. Get the right people on board and hold them accountable.
- Be realistic. Some organizations want to aim high with budgeted revenues to encourage staff efforts and boost morale. While aspirational goals are good, consider the pressure staff feel when the target is unreachable. If staff are involved in the budget process, even in a small way, they’ll understand the issues the organization is facing and won’t need unrealistic goals to feel encouraged. Create the budget based on your current resources and, if you’re expecting a change later, create a separate “what-if” budget so that you’ll know how to adjust if the change occurs.
- Budget for a surplus. Don’t feel like your revenues and expenditures have to be equal. It’s OK and usually advisable to budget for a surplus of revenues over expenditures. Many new organizations think that a nonprofit is not allowed to make a profit, but that is certainly not true. Please budget for a healthy reserve fund so that you can still make payroll and keep the lights on if your organization experiences a shortfall in revenues.
- Revise mid-year if necessary. Don’t be afraid to revise the budget mid-year if something significant happens. This is especially true for newer organizations or even new programs that don’t have enough historical data to prepare an accurate budget in advance. The goal is to keep the budget as relevant and useful as possible. We’re not suggesting you revise the budget every month, but it might be a good idea to determine a date during the original budget development when you’ll revisit the budget to test assumptions and make necessary adjustments in order to stay on track and use resources wisely. If you budgeted for $100,000 in revenues by the sixth month, but you’ve only secured $5,000 at that point, consider adjusting the budget. You wouldn’t want to allow budgeted expenditures of $80,000 if it’s become clear the revenues won’t be available to offset. Maybe you can revise fundraising techniques or something else about the project instead, but please know that revising the budget is an option.
- Board approval. Be sure the board of directors approves the budget. It’s a responsibility of management to create the budget, but it’s a board responsibility to approve it. If the board isn’t financially savvy enough to feel comfortable doing this, they should either get appropriate training on understanding nonprofit financial statements or include a trusted group of advisors to review the budget with the board. It’s always a good idea for board members to have some basic knowledge about nonprofit-specific financial and operational matters in order to serve as effective oversight for the organization.
In summary, the budget process is an important process for assessing prior year accomplishments and discussing future goals and risks. Allow enough time for reviews and revisions by everyone involved and, once your budget is finalized, be sure to compare actual financials to the budget on a regular basis. Use the budget as a tool for ongoing accountability and also celebration when goals are achieved.
