It’s no surprise that effective budgeting is an essential part of ensuring an organization’s growth and sustainability. Knowing where your dollars are coming from and going to seems like a basic concept…right? Well, for many nonprofits, especially for start-ups, the realm of budgeting is a new and intimidating territory. Let’s start by taking a look at a few of the “who,” “what” and “whys” of the budgeting process.
“Why does my organization need a budget?” Budgets are elements of financial control which help to set limitations and keep a balance between revenue and expenses. Most third party stakeholders require a formal budget to be presented before gifts are made or grants are considered, even if your organization’s administration does not “require” it. The process of compiling a written financial plan also has the benefit of bringing long- and short-term goals into focus. Planning provides clarity and can help organizations avoid preventable pitfalls in the future.
“Who should take part in the budgeting process?” Even if your organization has only one staff member or is run by volunteers, budgeting should be a group effort. The board and executive director should all take an active role in the budget process. Many organizations also choose to hire an outside professional with budgeting and accounting expertise in nonprofit budgeting and accounting to add objectivity to the process and guard against fraud or conflicts of interest.
“What are the traits of an effective budget?” Utilizing unsubstantiated revenue projections is a sure-fire way to render a budget useless. While budgets are, indeed, comprised of both fact and assumption, such assumptions should be conservative, supportable and measurable. Remain flexible in the budgeting process by ensuring opportunities for amendments to address the unexpected.
The Nonprofits Assistance Fund (NAF) stresses the importance of strategic planning in the creation of an effective budget. Once an organization’s goals have been clearly defined, the NAF breaks the budgeting process into eight steps. While each organization’s steps will vary somewhat and be determined by individual structure, the primary procedural concepts remain the same.
STEP 1: Planning the Process. Identify who will be involved; agree upon budget formats; set timelines and deadlines.
STEP 2: Communicating the Process. Communicate responsibilities and expectations to everyone involved; distribute and explain forms and assumptions.
STEP 3: Programmatic Goal Setting. Determine program goals and objectives; project staffing requirements and salary/benefit assumptions based on program goals; get board agreement on goals and assumptions.
STEP 4: Information Gathering. Research and gather information about income and expenses based on program goals and assumptions; construct budget details by program; allow enough time to address questions, recommendations and revisions.
STEP 5: Compilation and Revision. Select one person to compile all information and review it for consistency; redistribute to everyone involved, leaving time for review and revision.
STEP 6: Committee Review. Have finance committee and other appropriate staff review budget draft and key assumptions.
STEP 7: Final Approval. Distribute information to the board prior to meeting for final approval (budget draft, program goals, etc.); have committees play role in making informative presentations to the board based on opportunities, challenges and resources behind the budget numbers; have the finance committee or treasurer present the budget proposal to the board.
STEP 8: Implementation and Management. Where the real work begins. Communicate budget, program goals and timelines for the next year to staff, review actual income and expenses in relation to the budget on a monthly basis, update and revise the budget as changes occur during the year; obtain board approval depending on the significance of the changes.
Ruth Peebles, President of The INS Group, offers 25 years of experience in the nonprofit management. The INS Group is a national consulting firm that provides organizational development and capacity building services to nonprofits, government agencies and faith-based institutions. Services include grant writing, grant research, strategic planning, strategic fund development planning, succession planning, executive coaching, and board training and board development. Ms. Peebles can be reached at [email protected].