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Budgeting Terms & Concepts

The annual operating budget is associated with the Statement of Activities (SOA), previously called the Profit & Loss. It involves projecting revenue and expenses for a single fiscal year to accomplish an organization's immediate mission agenda. The annual budget can be projected over multiple years as part of a strategic plan to incorporate the budget impact of longer-term strategic initiatives. In building an effective operating budget it will be advantageous for everyone involved in the budgeting process to have some familiarity with relevant budgeting terms and concepts below.

Budgeting Methods
Revenue based budgeting is my preference; however, there are other approaches to budgeting commonly used by small and midsize groups. Some combination of all of these approaches could be used, depending on the organization's circumstances.

• Revenue based budgeting calls for budgeting revenue first using realistic targets and including only reliable revenue in the budget. Never include a revenue projection that simply fills the gap to cover expenses; that will set the organization up for a budget deficit if the organization fails to hit the “plugged” revenue targets. Rather, make sure the budgeted expense total is lower than the dependable revenue total. This requires cooperation among all departments in setting organizational and programmatic priorities, and timing new or adventuresome programs.
• Conditional or aspirational budgeting includes exploring what-if scenarios that can provide a plan B for austere or conservative revenue based budgets. Using this method, a desired project/program could move forward only if specific additional revenue comes in, in excess of what was in the original budget.
• Incremental budgeting begins with prior year totals and builds the subsequent year's budget by calculating percentage increases/decreases. This can be efficient if there are few or no significant changes in the character or number of programs, staffing, etc.
• Zero-based budgeting starts from scratch every year. How much can we raise? How much can we spend? What are the most important mission activities? Zero-based budgeting forces reevaluation of all assumptions and can promote valuable generative discussion among decision-makers.

Return to the Budgeting & Financial Planning Introduction  page for other content and downloadable resources pertaining to budgeting.

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