When it comes to financial planning, few things are more important to a nonprofit than the creation of the budget. It’s how the board of directors and staff plan for income and expenses. Approval of the annual budget is a fundamental step toward sound financial management. Staff is responsible for creating the initial draft of the budget, and then the full board must review and adopt it.
The approved budget serves as a guide for financial activity going forward. It helps your nonprofit plan for the future and assess its current financial health. But you have to periodically review the budget and compare it to actual cash flow and expenses. If not everything is playing out as expected, you may have to amend the budget during the year.
Budgets may be requested by parties involved in financial transactions with your nonprofit, including banks as well as donors and grantors considering making a gift. If you share your budget, make it clear that it’s reviewed periodically and revised as needed. You may instead offer a copy of your most recently filed IRS Form 990 showing operating expenses and revenue during your fiscal year.
Some more things to know about budgets:
- They don’t always have to balance at the end of the year.
- Your budget reflects your programs, missions, and strategic plan.
- The budgeting process should start at least three months before the end of the fiscal year so that the budget can be approved by the board before the start of the new year.
- Your timeline should include the target date for board approval, leaving enough time for each step of review and discussion.
- The framers of a budget must agree on goals: prioritizing program delivery goals, setting the organization’s financial goals, and clarifying annual goals from your strategic plan.
- You should review current-year income and expenses compared to your budget frequently.
- The framers of a budget should forecast to the end of the year before beginning the budget-making process and analyze and understand any year-over-year variance in income or expenses.
Before creating a budget, make sure all stakeholders agree on an approach, assign roles and responsibilities, and agree on who has the authority to make decisions and on how much uncertainty can be included. Next, develop a draft expense budget that focuses on costs and a draft income budget that projects income based on current fundraising and revenue activities. These will help you project income based on new activities.
When you review your draft budgets, verify that they meet program and organization goals. Review and discuss all assumptions. Make adjustments based on goals and capacity to match income and expenses. Then come up with your final draft budget.
Now you’re ready to present the draft budget to any committees as needed and then to the board to get its approval. Document budget decisions by creating a consolidated budget spreadsheet and writing down all assumptions. After that, you’ll be ready to implement the budget by assigning management responsibilities, incorporating it into your accounting system, and, most importantly, monitoring and responding to changes as needed.
You may be wondering, “How can I more precisely predict contributed revenue?” It is tricky, and it does increase risk in your budget, so predict the probability of revenue. Using probability methodologies can help you arrive at a range of contributed revenue and can be useful in setting expectations for your board.
This is just a general overview. Every organization will have its own budget needs. Work with qualified financial professionals to ensure your budget process is appropriate for your organization.
To learn more about how our firm can serve your nonprofit organization, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.
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