Nonprofit Budgeting Essentials by Angela Dorn, CPA, Partner
Nonprofit Budgeting Essentials
By: Angela Dorn, CPA, Partner
Nonprofit organizations are often faced with a balancing act–striving to reach ambitious goals for their mission while dealing with the constraints of limited funding. In an effort to attract donors and achieve positive financial results, transparency is not only important, but it is imperative. One of the best ways to accomplish this task is to prepare an annual budget that is approved by the organization’s Board of Directors. But the process does not stop there: following the plan is key to success.
Anticipation of available resources can be difficult even in the best of times. Many dynamics beyond the control of the organization weigh into the outcome, such as the status of the economy. A conservative approach is often the best method for budgeting available resources. Several factors play into determining accurate revenue numbers. Expected donations from donors, grant opportunities, and capital campaign goals all play a role in developing the plan for funding. An additional consideration can be given to whether the organization has accessible fund balance or reserves that it plans to use in the current year.
By this time, fundraisers for the year should already be planned. The receipts the organization expects to raise needs to be compared to the costs of the events. These types of activities should support the nonprofit function rather than serve as distractions. Projected funds should include donations to be received at the events, as well as the amounts anticipated from ticket sales, raffles, auction items, etc. Then the amount these types of activities are expected to cost the organization should be examined to insure the fundraising events will be beneficial to the organization. Direct costs as well as indirect costs should be estimated at this point.
Once the available resources can be determined, the focus should switch to the expected use of the funds. Start with the bare minimums, such as the fixed costs. Many times this consists of payroll expenses of key employees, occupancy expenses, utilities, and insurance.
Then step back and take a look at the available funds left to directly support the mission. This is the amount to be expended on the program activities. Is there a goal to increase the reserves or are there projects that will require the use of reserves this year? What can be done to stretch the dollars for meeting the needs of the organization? The goal is to have the ability to adequately support the mission of the organization.
The next piece of the budget process would be to examine the expenses on a functional basis. The organization should have a written plan to define how it allocates shared expenses across program, management and general, and fundraising. Many donors look for this when making the decision to support the organization and they like to see their funds being used for the benefit of the mission.
After the budget is approved, the monitoring begins. Regular assessment of the organization’s actual results in comparison to the budget is as important as the preparation of the original budget. Throughout the year, if results are not lining up with the expectation, the plan should be reviewed and revised. Proposed amendments, if necessary, should be presented to the Board of Directors for approval. Knowing the financial goal and working to attaining it will go far in making the organization a success.