Budgeting 101 for Nonprofits outlines budgeting best practices for nonprofit organizations.

1. Budgeting 101 for Nonprofits
Kevin Derrivan
Senior Consultant

2. About Us
• For more than a decade,
Accounting Management
Solutions, (AMS) has
provided accounting support
and financial management
leadership at the consulting
CFO, controller and
accounting manager level to
dynamic companies
throughout the Northeast.
2

3. Agenda
• The basics of budgeting.
• Why budgets are important for control
purposes.
• Various types of budgets.
• When each type of budget is used.
• How to prepare and address some of the
important parts of a budget.
• What are their limitations?
3

4. What is a Budget?
• Budgets are summaries of short-term
operational activities of a organization.
• For example, a organization may prepare a
cash budget to predict cash inflows and
outflows.
• Budgets are quantitative representations.
4

5. Budgeting vs. Forecasting: There is a
difference
• A forecast is a prediction.
• There are many hypotheticals before a forecast
looks like a budget.
• A forecast can only predict.
5

6. Budgets are . . .
• …. a strategic organizational plan.
• …. based on facts, events in progress and
actions planned.
• …. a collaborative effort by finance and the
departments affected by obtaining input
before preparation.
• …. managed by department heads to make the
required steps to achieve the budget.
• …. necessary for planning and for controlling.
6

7. Various Types of Budgets
• Two Major Types
• Operating Budgets
• Capital or Investment Budgets
7

8. Characteristics of a Budget
• Stated in monetary units however, could contain
non-monetary items such as units produced,
sold, no. of items processed etc.
• Usually, short-term (one year) but could be
extrapolated from or to the longer term.
• Senior management must be involved in the
process and must approve it.
• Most important – budgets must be compared to
actual and the variances must be investigated.
8

9. Critical to Forecast & Create a Plan
• Management should review Budget on a
monthly basis
• The Board should receive a copy on a monthly
basis
• Managers should meet with finance on a
monthly basis to discuss the financials and any
unbudgeted expenditures.
9

10. The Budget Process: Best Practices
10

11. Know Your Goals and Objectives
• Planning and Goal Setting must be
completed before the budgeting process
begins
• Lack of proper planning/goal setting may lead to
poor budgeting
• If people do not know their goals they may not
know how to start or may repeat current mode
of operations
• May miss substantial changes - may budget too
little or too much, causing a lot of rework and
frustration
11

12. Get Upper Management Support to
Create “Buy-In”
If they don’t care - no one else will. They
need to:
• Lead approval of Organization Goals and
Operations Plan
• Be involved/leaders in the budget process
• Support the process by MANAGING their staff
to the timelines and product completeness and
accuracy
• Approve all budgets prepared by those they
supervise
12

13. De-centralize the Budget Process
• Every manager who has a responsibility for a
budget should be involved in the process
• Understanding the rationale for their budget
enables them to “own” it and act as stewards of
their department expenses; since they understand
the costs of running their program, they also
become better fundraisers
• The finance department can help coordinate the
budgeting process but should not be putting
together program budgets; they are not the
individuals responsible for the budget
Holds everyone accountable for day to day
13
activities!

14. Involve Staff at Other Levels
Get their buy-in and delegate projects for them to plan
and budget; the more they are involved, the more
they will work to help the organization succeed
• Example: Budget for a Special Event – the Event
Planner reports to the Director of Fundraising; while the
Director of Fundraising is the manager involved in the
budget process, the Event Planner also needs to be
part of the budget process
• Example: A Day Care Center has 4 breakfasts a year
for the mother’s of the toddler group; the Assistant
Toddler Teachers are in charge of this; get them
involved in how much the breakfasts will cost and how
much they need to spend 14

15. Create Strong Tools & Training
What can we do to involve others in
the budgeting process?
15

16. Create Strong Tools & Training
• Host a Budget Training
• Create a Budget “toolkit” (typically your
finance team would create this; starts with
providing key assumptions and likely trends
affecting the business environment during the
budget’s timeframe)
• Provide Written Instructions & Timelines with
Dates/Deliverables
• Budget Template (fill in the blanks) – managers fill
in blanks and the template automatically calculates
and assigns overhead and related costs
16

17. Create Strong Tools & Training
Create a Budget “toolkit” (continued)
• Historical Info (Ops and Projects) and Year-to-date
Info. - adjust for any changes in the new budget
(Incremental Budgeting) Examples – COLA or
inflation increases
• Some Research – For new programs or events, get
estimates and provide Narratives (Zero Based
Budgeting - start from scratch)
• Include any projects/costs for which you have
received restricted funds or grants
17

18. Create Strong Tools & Training
Create a Budget “toolkit” (continued)
• Aligning the look and feel of your budget template to
your chart of accounts and the format of your
financial statements gets everyone on the page
• Some accounting software packages allow the
importing of budgets directly from Excel, so you may
want to consider using a worksheet in the template
that allows each budget to be automatically entered
18

19. Budget Template
See example budget template in Excel:
• Has instruction page
• Fill in the blank format based on color codes
• Some info filled in for them
• Data entry creates final budgets (linked
worksheets) and import into accounting system
• Budget and GL should be in format that allows
easy reporting for UFR and audit
19

20. Budget Template
Very Specific and
easy to
understand
20

21. Budget Template
Automatically
filled in from
worksheets Historical Data
21

22. Budget Template – Staff “Fill-in”
Simply Fill In the Blue
shaded area
The Purple Areas
automatically get
created
22

23. Budget Template – Import Page
Formatted to automatically
upload into your
accounting system
23

24. Budget Template – Final Budget
Summary by Program
24

25. Budget Template – Work backward
from final approval deadline
Date Date Staff Deliverable
Issued Completed
10/4/2004 10/18/2004 Manager Budget draft in budget template needs to be reviewed and
completed by budget managers.
10/18/2004 11/1/2004 Supervisors Review the budgets submitted by Managers and review for
reasonableness and completeness.
11/1/2004 11/15/2004 Finance Finance does internal review and meets with supervisors and
budget managers for final sign off.
11/15/2005 11/22/2004 Executive Executive Director receives organization budget summary.
Director
11/22/2004 11/29/2004 All Final review meetings are held with budget manager,
supervisor, finance and executive director.
11/29/2004 12/6/2004 Executive Budget presentation is completed and forwarded to the Board
Director and for review.
Finance
25

26. Review the Template
• Historical Info Provided
• Summary Page
• Salary, Benefits, Ops Page
• Place for Narrative information
• Projects
• Import Page into Accounting System
26

27. Revenue-Generating Staff
• Work closely with your development office to
assist with revenue piece if you are a grants-
based organization
• Work closely with your finance department if
you are a membership organization
• Weigh potential revenue sources by %’s
(likelihood of receiving X)
• Goal is to work with all staff throughout the org.
to look at external markets, including sources of
funding at the local, regional, and national
economy 27

28. Budget Components
Besides the basic operating revenue and
expense, what are the different
components of your budget?
• Capital Expenditures/Fixed Assets/Construction in
Progress (CIP)
• Surplus
• Cash Flow Projection
• Temporarily/permanently restricted revenue
28

29. Budget Capital Expenditures
Why budget for these items (capital
expenses) if they do not hit my income
statement?
They will:
• Increase your budgeted depreciation expense
• Increase your overall expenses
• Thereby increasing needed operating revenue
• Increase your cash flow/cash outlays needed
29

30. Why Budget a Surplus?
• Ensuring that your organization can sustain
itself during an unexpected change or difficult
period
• Work with management to project a surplus;
identify other revenue sources
30

31. Project Cash Flow
• Prepare a cash flow projection with your
budget
• Monitor and adjust monthly
• Review with management and the board
31

32. Budget Temporary & Permanently-
Restricted Revenue
Why budget for these revenue sources if they
do not hit my Unrestricted Column on my
Statement of Activities?
They will:
• Affect your final organization surplus/deficit result
• Provide revenue goals and results for fundraising
for future years
32

33. Manage Your Operating Budget &
Your Audited Financial Statements
• Don’t forget to budget for non-cash expenses
(depreciation expenses, vacation expenses,
deferred salary or benefits, etc.)
• Vacation accruals can turn a $10,000 surplus
on an operating budget into a deficit – don’t
be surprised at year end
• Understand the difference between the cash
basis and accrual basis of accounting;
communicate this to management
33

34. On-going Activity
• The budget process is not a once-a-year
activity
• Management should be meeting with the
managers once a month to review the actual
vs. budgeted performance and plan (project)
for the rest of the year
• Some organizations even re-budget mid-year
if there are substantial operational changes
34

35. Policies & Processes
• Once all draft budgets have been analyzed, modified,
balanced, etc. prepare an overall budget document
and presentation
• This includes who presents, when they present, and
what format they present the organization’s budget to
the board of directors for approval
• The presentation should include the goals and
objectives for the upcoming year
• A summary of the total income and expenses
contained in the budget
• Have an Organizational Chart/Staffing Plan available
for review
35

36. Policies & Processes
• Have an summary of income by individual sources
• A summary of expenses by broad categories such as
salaries and wages, consultants and contract services,
supplies, facilities, materials
• Overall budget summary should have comparative data
from the prior year and current year (with projections);
include a column indicating total change either by % or $
amount
• Depending on the organization, the finance/executive
committee should review and approve the budget before
the full Board
• Provide guidelines on how changes to the budget are
made an approved, how expenditures that exceed
budgeted amounts are approved, etc.
36

37. Other Supplemental Data
Budgeted Expense 2010
1% 1%
1%
2%
6% 3%
7%
43%
7%
8%
9%
12%
Salaries Payroll Taxes and benefits
Office expense Consultants
Professional fees Rent and building expense
Depreciation and amortization Program supplies and expenses
Training and travel Interest
Insurance Real estate taxes
37

38. Policies & Processes: Flex Budgets
• If the organization reaches financial goals
during the year, it can do more; build a flex
budget into the budget process
• Flex budgets provide a financial management
and motivation tool
• Gives the board comfort in knowing that the
organization won’t risk financial operations to
reach stretch goals
38

39. Other Policies & Processes
• Work Plans – Every Department/Program
should have one at the beginning of each fiscal
year; mirror organizational budget plan
• Federal or State Grants – Any carryover funds,
if allowed, should be monitored; any budget
modifications should be requested in writing
(any budget changes from a prior fiscal year will
affect this)
39

40. Contact Information
Kevin Derrivan
Senior Consultant
Accounting Management Solutions, Inc.
kderrivan@amsolutions.net
781-419-9266
www.amsolutions.net
40