Reporting and Operations

Budgeting and Financial Planning

Financial Management CycleReporting

Effective financial management is an ongoing process that features a cycle of good management habits.  The financial management cycle is completed when board and staff leaders use the results of their analysis of the accurate and contextual reports they have received during the year to inform their plans going forward.  Financial planning, in essence, is budgeting.

Organizational Budget

Operating Budget

Associated with Statement of Activities (Income Statement, Profit & Loss)

  • Planning income and expenses for a single fiscal year to accomplish immediate mission agenda
  • Can be projected over multiple years as part of a strategic plan to include implementation of strategic initiatives

See Budgeting Practices.

Capital Budget

Associated with Statement of Financial Position (Balance Sheet)

  • Planning for optimal cash position (operating & emergency reserves, other strategic reserves)
  • Planning for capital investments (equipment upgrade/replacement, facilities acquisition and/or maintenance, special projects, etc. over a longer time period)
  • Planning for long term endowment (if appropriate)

See Budgeting for Capital.

 

An organization's financial planning should include budgets for operating and for capital.  Together these comprise an Organizational Budget.  Creating an annual operating budget is a familiar task.  However, creating a capital budget, or capitalization plan, is often overlooked or deemed unnecessary for small or midsize groups or construed as only necessary for a capital campaign.

The annual budgeting Process should be documented, with tasks, responsibility assignments and deadlines clearly stated.  A good budgeting process:

  • engages those who are responsible for adhering to the budget in the creation of the budget,
  • allows time for the Finance Committee to participate,
  • provides adequate time for research, review, feedback, revisions, etc. before the budget is ready for presentation to the full board,
  • incorporates strategic planning initiatives,
  • is characterized by realistic projections for income and expense
  • is income-based (expenses do not exceed the realistic income projections)
  • identifies fixed costs and relates them to reliable revenue,
  • is driven both by mission priorities and fiscal accountability.

A well constructed operating budget will demonstrate in numbers the organization's commitment to fulfilling its mission.  It will be based on reliable income projections and expense projections will be well-researched, conservative, and thorough.  Those building the budget will understand what components of it are fixed and which can be adjusted as the budget year progresses.  [See Budgeting Practices, Budgeting Terms & Concepts and Basic Accrual Concepts]

Although the concept of developing a capital plan, or capital structure, may seem odd for a small or midsize nonprofit organization to consider, the truth is that any size organization has a capital structure, whether conscious of it or not.  Deliberate capital structure planning takes into account building resources for long-term, non-operating needs.  These might include: asset purchases (such as inventory, equipment, or leasehold improvements), financial stability targets (such as building an operating cash reserve or equipment/facility maintenance/replacement reserves), and funding program or management initiatives per the organization's strategic plan (such as a pilot program or staff capacity building).  Capital budgets often require a funding plan separate from and in addition to the operating budget.  This plan can include a capital campaign as well as other funding strategies such as specific project requests and designations of accumulated surplus.

For small and midsize organizations, priority should be given to building an operating reserve before considering establishment of an endowment.  Endowment funds are permanently restricted and the principal cannot be used for operating, cash flow, or other purposes.  Conversely, an operating reserve creates liquidity and financial flexibility for the organization and positions it to withstand emergencies, temporary cash flow fluctuations, or unplanned reductions in revenue or increased demand for its programs.  Organizations with sufficient operating and other designated reserves can focus beyond day-to-day cash flow needs and more effectively plan for the long-term health of the organization.  Organizations with limited or negative liquidity tend to focus on the short term.  A cash crisis unproductively consumes time and resources, causes stress, and can hinder engagement in long-term planning and consideration of new mission related ventures.  

Good financial management requires the organization to be conscious and deliberate about planning for both its long term financial goals and immediate financial health.

 

Other Resources


Linking Mission and Money by Clara Miller
http://www.nonprofitfinancefund.org/docs/Linking_MissionWebVersion.pdf

Financial Planning for Nonprofit Organizations, by Jody Blazek, John Wiley & Sons, Inc., 2000

Financing Nonprofits, Putting Theory into Practice, edited by Dennis R. Young, AltaMira Press & The National Center on Nonprofit Enterprise, 2007

© 2009 Elizabeth Hamilton Foley