Reporting and Operations
The budget process is the way an organization goes about building its budget. A good budgeting process engages those who are responsible for adhering to the budget and implementing the organization's objectives in creating the budget. Both finance committee and senior staff participation is built into the process and a timeline is established leaving adequate time for research, review, feedback, revisions, etc. before the budget is ready for presentation to the full board. The annual budgeting process should be documented, with tasks, responsibility assignments and deadlines clearly stated. A good budgeting process also incorporates strategic planning initiatives and stipulates that income is budgeted before expenses. Fixed costs are identified and related to reliable revenue. Budgeting decisions are driven both by mission priorities and fiscal accountability.
Steps for developing a good budgeting process were covered in the previous section, The Budgeting Process.
Good budgeting practices:
- Practice income-based budgeting.
Budgeting is a form of risk management, and the most reliable budgets yielding the best fiscal results for the organization are conservative and income based. This means:
- Budget for income first. Base income targets on realistic expectations and only include reliable income in the budget. Never include an income projection that simply fills the gap to cover expenses. This sets the organization up for a budget deficit if the organization fails to hit the "plugged" income targets.
- Take care to understand the impact and timing of restricted contributions and releases on the operating budget.
- Ensure expenses are lower than the dependable income total. This requires cooperation among all departments in setting organizational and programmatic priorities, timing new or adventuresome programs.
- Analyze and understand your revenue concentrations.
Is your organization overly dependent on single source of revenue? In many cases, lack of diversification of revenue sources can pose a serious risk to the financial stability of an organization should a single large revenue source become unavailable. There is no universally right mix of revenue sources - the right mix for your organization depends on your particular circumstances, your mission, your industry, your staff capacity, and even the age of your organization.
- For an organization with little or no earned revenue associated with programs, having 80% of revenue from government sources may make total sense because of reliable, ongoing contracted programming.
- For another organization whose revenue sources appear to be well distributed among earned, government, foundations, corporations and individuals, the realization that 90% of foundation revenue comes from one large grant from a single foundation may still pose a concentration risk.
- Risk is also present if a big portion of an organization's annual revenue depends on the success of a single fundraising event or annual program event. The organization must understand the impact a cancellation of the event would have.
- Confirm your budget's relationship to your mission and long range/strategic goals.
One of the very first tasks in the example budget process provided in the Tools & Tips section of this web site is "Review mission and strategic plan" with the note "Ensure that all strategic initiatives with budget impact are included in budget process." An organization's budget can and should demonstrate its commitment to its mission through numbers. Confirming the budget's relationship to mission requires answering questions such as:
- Does the expense budget reflect the mission priorities of the organization by the way resources are allocated?
- Are we being pulled off course by going after grants just because they are available, even if they don't support identified mission priorities?
- If we are implementing programs that are not high mission priorities, are they at least contributing substantially to financially support the organization? As an exercise, plot your organization's programs on a Product Portfolio Map (example below). As long as there is some mission relevance, so called cash cows can support heart & soul programs, but for any that fall in the "problem" area, examine whether that program should be continued.
- Don't forget infrastructure.
Folks who work for small and midsize nonprofit organizations generally are very hard workers, intensely devoted to mission accomplishment, often working longer hours at lower pay than their for-profit counterparts. They deserve good tools and will perform even more efficiently and effectively with ongoing professional development opportunities and skills training. (Budget to send them to that Excel class!) Include information technology upgrades and maintenance, evaluation, and staff development costs in the budget. High quality programs can best sustain and grow with a well-trained and well-equipped staff, both program and administrative, to support them. Budgeting to provide good pay and benefits for staffers is also a way to keep those well-trained folks with you.
- Budget for capital in addition to operations.
An organizational budget should take into account the organization's annual operating income and expenses, as well as ensuring resources for long-lived and/or non-operating needs - this is the capital budget. An organizational capital budget might cover several years and it should include target amounts and fundraising strategies to achieve strategic and financial sustainability goals. These could include:
- creating or increasing an operating reserve
- deficit reduction
- furniture, equipment, or software purchases
- leasehold improvements
- a building & equipment maintenance and replacement fund
- a fund to support new program initiatives, experimental pilot programs, etc.
- a human resource capacity building fund
An organizational capital budget is different from a capital campaign budget, which is usually for bricks-and-mortar or other finite project(s), although they could be related. For more about budgeting for capital, see Budgeting for Capital.
- Provide narrative notes to explain budget assumptions to the board.
Board and finance committee members will appreciate explanations to help them understand the underlying thinking behind the numbers in the budget.
- It goes without saying* that it is best to use a spreadsheet program to build budgets, but if notes are too many or too wordy to fit conveniently into spreadsheet cells, the notes could be written in a word processing document. Whether or not narrative notes are in a separate document, be sure to add letter or number keys to associate each note to the related spreadsheet line.
- *I'll say it anyway: it is best to use the right tool for the right job and let the software work for you. Please, never use word documents for budgeting - it's just plain dangerous - the spreadsheet will do a more efficient and accurate job of adding those numbers up and will automatically revise the totals when changes are made.
- Pay attention to presentation.
Your budget could be brilliant, well-researched, and well-documented, but if it is unreadable, your work will be undermined. Budgets that are easy to read and understand are well-formatted. Characteristics of good formatting:
- columns and rows are well-labeled using font size, boldface, and underlines to create emphasis and for clarity,
- colors used for shading are chosen with black/white printing in mind, as not everyone will have a color printer (lighter color shading under dark fonts or lighter font colors for darker shading - dark fonts over intense colors are sometimes not readable when printed on non-color printers),
- column headers and row labels are carried to any second pages,
- enough detail is included, but not too much,
- narrative notes are given when appropriate and are keyed to the data they refer to,
- print parameters are double-checked before sending out electronic copies to avoid paper waste,
- footers include the file name and the work sheet name to assist with locating electronic version locations,
- consistent file naming protocols are followed to assist with version control (ORG FY10 Budget 2009-09-21 (Sept 21), then save new version as ORG FY10 Budget 2009-10-05 (Oct 5), and so on to have the latest version stack last in the Budget folder).
Having an inclusive and thorough budget process, a conservative approach, documented policies, efficient budget tools, and well-formatted budget presentation that tells your mission story "by the numbers" positions your organization to have the best results.
Learning from the Community: Effective Financial Management Practices in the Arts, a National Arts Strategies publication: Jim Rosenberg, Principal Author; Russell Willis Taylor, Editor, 2006
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