Budgeting basics for not-for-profit and charitable organizations
A commitment to sound financial management is a key component of financial sustainability, and this begins with creating a budget. Here are tips for creating a financial plan for the year ahead.
Preparing a budget helps not-for-profit organizations plan and allocate resources. A budget identifies any revenue shortfalls and provides lead time to develop strategies to prevent a financial crisis. Good budgets incorporate both financial and operational goals and help to communicate expectations and priorities to stakeholders.
The budgeting process
Prepare the budget
Begin with prior year data and year-end estimates.
Consult and collaborate with the people responsible for implementing the organization’s mission to ensure their needs are reflected and they understand any financial constraints that may affect them.
Add information about any program revenues and expenses that may be new.
Adjust for revenues and expenses from the previous year that are not expected to recur.
Bear in mind that some financial information may be missing or incomplete, in which case a “best guess” approach is needed.
Prepare a separate sub-budget for each program or funding stream to better understand how the various programs contribute to (or take away from) the organization as a whole. This is particularly helpful when the organization receives funds that are restricted to a particular project or purpose.
Make sure you obtain approval from the Board.
Implement and monitor the budget
Know that financial activity almost never goes perfectly according to plan; unexpected expenses and/or opportunities for new revenues can occur at any time.
Review your actual financial performance against budget expectations on a regular basis (typically monthly).
Be sure to identify variances between year-to-date performance and the budget. The reasons for these variances should be documented along with a forecast of whether the variances will increase, decrease or remain the same.
This budgeting process helps the organization stay on track with the financial plan and/or take timely and appropriate steps to correct the financial direction.
Don’t update your budget unless you have to
Changes happen. But changing the budget requires approval from the Board. It’s easier and more efficient to simply track and understand the variances between the budget and actual performance (as mentioned above). In the event of significant changes to operational plans, update the budget as appropriate and obtain approval from the Board.
Get out of the “break-even” budget headspace
The objective of not-for-profit organizations is not to have a “profit” (an excess of revenues over expenditures) but rather to expend revenues to accomplish its mission. However, a “break-even” budget is not necessarily the goal. Organizations may need to budget for a surplus in order to replenish reserves or to act as a buffer against unforeseen events. They may also wish to build up cash for a down payment on a future capital purchase that is needed to support the mission.
Done right, the creation, implementation and monitoring of the budget are enormously valuable. In addition to monitoring performance, the budget communicates expectations and priorities and provides a solid base from which to make financial decisions.
Tracie Bliss, CPA, CGA, is the Finance Manager of Secretariat Central, a turn-key association management company in the Greater Toronto Area. Secretariat Central’s Operations Division performs all levels of financial management, ranging from bookkeeping to budgeting, audit management and government filing compliance for not-for-profit associations and charities across Canada.
