Reporting and Operations
The Budgeting Process
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:
- Write it down.
Many organizations "have" a budget process, but it is not written down. Putting your process into writing creates a measurement tool against which you can monitor your progress and creates a checklist to ensure thoroughness in the process. When written down, the process becomes a durable management tool possessed by the organization rather than an intangible thing in the head one or two individuals. Institutionalize the process by writing it down. See Annual Budget Process Example Template.
- Decide who should be involved and when.
The executive director and program director(s) naturally play a significant role in the budget process, but departmental staff members who have responsibility for adhering to budgets should also play a role in creating those budgets. It builds buy-in and the process is informed by those with direct experience "in the trenches". Unless you have a board functioning as quasi-staff, usually staff members know more about operating details than board members, even very involved ones. In general, it is probably more efficient for staff to create the early drafts of budgets and use the time of finance committee members to review and vet the proposed drafts.
- Establish an annualized timeline.
Start earlier. Many funders require budgets for the following year far earlier than small and midsize organizations customarily get serious about budgeting. Aim for having the budget approval by your board at least two months before the new fiscal year begins. Earlier is even better, if feasible. You know your peak business cycle - integrate the annual budget process into a time during the year when key participants, paid or volunteer staff, have the time to focus on it.
- List specific tasks with specific responsibility assignments.
Within the timeline, list tasks specifically, e.g., "Distribute departmental budget worksheets and prior period financial data for reference" or "Research costs of database software". Even though many people may contribute to a task, pick one person to take leadership responsibility for making sure it happens. If the responsible person knows he or she will be held personally accountable to have completed the assigned task by the deadline, it is more likely to get done.
- Ensure that budget line items and accounting line items are in sync.
Budget line items should align with accounting (financial statement) line items, and the structure of the full operating budget should match the chart of accounts (the structure of the accounting system), to ensure effective comparisons between budget and actuals. A mismatch between budget items and accounting items creates extra work for administrative staff or key volunteers who must translate between the two and risks inconsistencies that undermine the usefulness of financial reports. Especially for expenses, when accounting/financial statement line items exist without corresponding budget line items, it can result in budget overages or erroneously reported line item balances.
When creating expense budget line items, be aware of how these internal line items translate to specified line items for outside reporting requirements such as the IRS 990, common funder application formats, industry surveys, and agency data gathering such as the Cultural Data Project. While these should not dictate precisely how you construct your budget, being able to easily cross-walk your items to the required items will facilitate meeting these reporting requirements more accurately and will use staff or volunteer time more efficiently.
- Develop worksheets, templates, and tools that promote inclusion of all relevant budget components and facilitate "what if" scenarios.
Work part-to-whole: The format of the budget to be presented to the board need not have the level of detail that staff or finance committee members see. Using detail worksheets (examples listed below) as tools to build a "Full Budget" and a "Summary Budget" allows staff and finance committee members to go deep into the trees while presenting the forest to the board.
Use the detailed budget worksheets to prompt deeper thinking about budget components and to help ensure nothing is forgotten. Link these worksheets, or workbook tabs, to a Full Budget sheet in a single, multi-tab workbook. For instance, for the budget/accounting line item of "Insurance" a detail budget worksheet could prompt for the various types of insurance to be carried by the organization such as general liability, directors & officers, vehicle insurance, etc. The cost of each is entered in the detail worksheet and added together for the total insurance budget amount in the Summary Budget via a formula linking the detail to the summary.
- A detailed Earned Revenue worksheet might include variable factors such as # of events/classes/programs/concerts/venues/beds, etc., # of participants/clients, prices, % capacity, discounts, etc. allowing staff to play out what-if scenarios by changing these variables to see the resulting impact on the Full Budget.
- A detailed worksheet for Contributed Revenue would include a list of previous institutional donors and individual donor campaigns with prior gift amounts that would help staff to predict which of these could be depended upon for the upcoming year. These details would accumulate and link to the line items for Government, Foundations, Corporations, and Individuals in the Full Budget, so that the impact of any changes to the detail worksheet would flow through. Temporarily Restricted contributions and releases should be included in a separate section and tracked carefully to ensure that releases to unrestricted are budgeted appropriately. In-kind contributions can be included on this worksheet or on a separate one, depending on the quantity and complexity of such contributions. See Budgeting Terms & Concepts.
- A detailed Personnel worksheet would list each paid position with annual salary and would be set up to automatically calculate formula-driven related expenses such as Federal payroll taxes and other formula-driven fringes (e.g., state unemployment, workers' compensation, pension contributions, etc.). A formula on this worksheet to calculate % salary raises would allow management to see the difference in impact of 2% vs. 5% increase on the overall budget. This worksheet, or a separate one, would also include a list of fee-paid contractors the organization regularly engages such as consultants, accountants, designers, teachers, counselors, social workers, researchers, interns, etc. that would also link in total(s) to the summary budget.
- A detailed Non-Personnel Expense worksheet would provide the opportunity to list the various organizational business expenses (bank fees, credit card merchant charges, dues & memberships, insurance, interest, licenses, registrations) office and general expenses (conferences & meetings, printing jobs, copying, mailings/postage, supplies, telephone and technology), occupancy (rent, utilities, maintenance, security) and trips (local and long distance travel, transportation, accommodations, per diems), as well as any specialized program-related expenses.
- Other detail worksheets for Capital Purchases, In-Kind Contributions, and special worksheets to suit the specific departmental needs of your organization can be created as necessary and linked to the Full Budget.
See an Example Budget Template [Link: TBA ] in the Tools & Tips section of this website.
- Adopt policies for adhering to budgets, handling variances, approval authority, etc.
It may seem obvious, but a general statement of your organization's approach and expectations sets the tone not only for the process of creating the budget, but also for implementing it. A general budgeting policy might state that:
- The organization will strive to create surplus budgets that feature realistic revenue projections and conservative expense projections;
- Income and expenses will include the budget impact of strategic initiatives;
- The balanced budget will include depreciation expense and an amount (or specific % surplus) to increase cash reserve as determined by the organization's multi-year capital budget;
- All budget line items will be allocated to the organization's programs, administrative and fundraising activities using a reliable and defendable calculation method.
- All budget line items (except non-cash depreciation) will be estimated on a cash flow basis by month and so entered into the accounting software to assist with producing year-end projections and in monitoring cash flow.
A variance policy might clarify how much discretion the executive or department heads have in implementing the budget. For instance, do the department heads have discretion to repurpose expenses between line items within their purview as long as the result does not exceed the approved total for the department? Should an overage be anticipated, it might state that the department head should inform the executive director to see if the overage can be mitigated or absorbed by another department. It might stipulate that any expected overage of more than XX % must be reported to the finance committee for approval.
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