We’re coming up on budget planning and preparation season! Your budget is always on your mind, right? It can seem tricky and stressful, especially considering the fact that the National Council for Nonprofits describes the annual budget as, “… one of the fundamental building blocks of sound financial management.”
Financial leaders know the annual budget is critical for understanding where your nonprofit organization is going and how you’ll get there. A poorly developed budget can diminish opportunities and threaten your success. How can you stay on top of the nonprofit budget process? A great place to start is by asking the right questions, including:
Should our budget balance? This is a key question for ensuring your organization withstands challenges. Though conventional wisdom states you should maintain a balanced budget, there are varying situations and scenarios. You may need to develop a:
- Surplus budget – This budget type drives an increase in reserve funds, generating more income than expenses. Why? Your organization can pay down debt, ease cash flows, or improve net assets. Just be sure your surplus budget is realistic with a feasible plan in place for how you will manage reserves.
- Deficit budget – This works when you have a large reserve of funds and seek to spend or invest to benefit your organization. It’s appropriate to use these funds to expand services, invest in new programs, or for one-time purchases that will lead your organization to have more expenses than income for that year. Be sure you plan a deficit budget well and have a communication plan so the deficit is not misinterpreted as unplanned or unintentional.
- Break-even budget – This budget-type may not allow you to accumulate reserve funds or invest in your future, but can provide an adequate foundation to deliver your mission. It will traditionally outline higher expenses than revenue, requiring you to find ways to boost income and cut costs. With this kind of budget, projections and programs need to be carefully planned out to ensure your organization does not sacrifice mission delivery.
Cash versus actual? Which method works best for your organization? Let’s break down the types:
- Cash – This method focuses on the simple inflow and outflow of cash. Your organization earns revenue at the point a deposit is made, and incurs an expense at the point a check is cut.
- Accrual – Using this method, your organization will recognize revenues and expenses at the time they are incurred.
- Modified accrual – This is a more hybrid approach, combining both cash and accrual methods by allowing revenue to be recognized at the time it becomes available and expenses when they’re incurred.
Specific requirements and needs will help you determine the appropriate budgeting method for your organization.There are numerous factors to consider to help you determine the best method for your organization, including external requirements, cash flow position, and internal skill sets. You’ll also need to weigh the amount and variety of your funding, the size of your organization, and your amount of payables and receivables.Whatever method you choose should be the right fit for your nonprofit and be communicated and fully understood by all internal budget and financial stakeholders.
Have we identified and documented a complete process for budget planning and preparation? Following a budget process practice is crucial to keeping everyone involved and committed to your budget. Here are some key process practices:
- Review financial performance
- Prepare for planning
- Establish a timeline
- Set goals
- Determine costs
- Project income and forecast flows
- Draft budget
- Review and receive your draft budget
- Approve budget
- Implement Budget
You’re probably nodding along at this point – but, there’s so much more to consider! To help, we’ve developed several budget guides to provide assistance to you at every step. From start to finish, “Building a Better Budget: The Nonprofit Budget Roadmap” provides all the key best practices and insights into developing an efficient and effective nonprofit budget. You can also stay up-to-date with your budget reviews by reading our whitepaper, “Budget Checkup: Critical Components to the Nonprofit Budget Review Process” and stay up-to-date with our Budget Checkup Calendar. Good luck and happy budget building!