Year End Planning: Creating an Effective Budget For Your Nonprofit
Planning is a key area in all successful organizations. A budget is simply a planning tool that reflects an organization’s mission, program, and short term goals. It allows both management and your board of directors to adequately manage your organization’s financial health.
A common best practice is to ensure an organization has an operating budget approved by its board of directors prior to the New Year. For most organizations, this means beginning the budgeting process at least three months prior to year-end. For this reason, your organization’s 2015 budgeting process is probably well underway. If such is the case, you can use these tips to address its effectiveness. For organizations that have yet to begin the budgeting process, rest assured, there is still time to initiate an effective budget.
In part one of this series you’ll receive the details of an effective budget, while part two will discuss the basic processes of developing your budget.The Components of an Effective Budget
An effective budget requires time and effort to develop and implement. An effectual budget will include the following:
It will cover a defined set of activities:
This means that every separate project and program should have its own budget. Once the project and program budgets have been defined, they should be combined into one organization-wide operating budget.
This will allow you to assess each project and program individually, clearly identifying problem areas so you may readdress them.
It will cover a specific time period:
Most budgets are annual budgets; however, dividing your annual budget into quarters or months may be beneficial for many organizations.
Doing so will allow you to analyze your budget every few month, enabling you to detect variances in your budget early on. If you are over budget in quarter two, you’ll have an opportunity to cut spending in the remaining quarters/months to remain on target with your budget for the year end. At the end of the year, you’ll also be able to analyze each section and replicate previously used strategies in the future.
It will be realistic:
Often times, managers over or under estimate expected revenues and/or expenses, leading to cash shortfalls, and improper allocation of resources. This results in your budget becoming an ineffective planning tool.
To avoid this, base your budget on historical facts as well as future assumptions. Analyze past income and expenses and use your data to create a realistic budget for the year. You should also take time to develop a contingency plan with your board that details how excesses and shortages in the budget will be dealt with.
It will be measurable and flexible:
The budget should be prepared using the same accounting method on which the books are maintained and monitored regularly.
This will allow you to measure your predicted budget against your actual income and expenses in real time. If actual events and conditions vary from your budgeted assumptions, there must be opportunities to amend the budget and address revenue shortfalls and unexpected expenses.
Maintaining your budget this way will allow you to assess and correct your budget as needed, while flexibility will enable you to alter your budget when necessary.
Keeping these tips in mind while planning your budget will make it changeable and effective. Part two of this series will discuss the basic budgeting process you should go through while developing your budget.
Melissa Stockberger, Senior Accounting Specialist for Jitasa
Read Part 2 of this Series: - Nonprofit Year End Planning: Budgeting Processes to Remember