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. But a well-planned budget will position you, your team and organization in the right spot. In this blog, we’ve included helpful tips to make sure your fiscal year starts off right.
We recently polled 179 nonprofit finance and accounting professionals to get an update on how they’re managing their budget lifecycles. Please see below for the breakout of functions/roles of our responders, plus intelligence we gathered from their experiences.
The first chart below shows 58 percent of responders are in C-level and director functions, with another 40 percent in accounting roles. Since decision makers are a large percentage of our responses, you’ll find the following charts are a valid representation of the nonprofit industry.
The next thing we asked our audience was which cycle range does their organization use? For years, the majority seemed to be using July to June fiscal year; however, now we’re seeing a shift from that time range to 46 percent splitting between January to December (calendar year) and October to September.
Basically, an organization’s year cycle is based on their needs – some may align with their funders and others may align to their audit schedules, giving them more time to prepare. At the end of the day, nonprofits should align to match their contribution cycle, which will help create a budget without blind spots.
We know nonprofits use different methods to track, access and report on budget to actual in the current year or a different fiscal year. 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.
What we found with our poll participants is they often need to the ability to report budget to actual in a different fiscal year. There are several instances why they would need to do that exercise – maybe they received a large funding they weren’t expecting. Or, they may have had a surplus that was being held for contingency purposes. No matter their reasons, you can see below, there is about half that need to report in a different fiscal year and the other half that maintain that budget to actual within their fiscal or calendar year.
A key question for ensuring your organization withstands challenges is to decide if your budget should balance to the projected. 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 it 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.
Lastly, we asked our poll participants if they modify their budgets during the year – see the response breakdown below:
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 number 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.
The best way to start your fiscal year off right is to ensure you have an established cadence for budget management, for this lays the foundation for minimal stress and a successful year. Here are a few final tips to ensure your year goes smoothly:
When it comes to kicking off your new fiscal year, make sure you’re also using automate tools that give you line of sight, in real-time, to help eliminate stress. If you’re organization is looking for an expert in the nonprofit industry and premier accounting software, then join us at our next webinar – MIP Live Demo, July 11 – Register here >>