Do you dread preparing your budget? Perhaps your accounting staff drop passive aggressive comments about needing your help to prepare the budget, but fortunately, you always have a pressing crisis handy to put off the budget meeting a bit longer. You know the board expects a budget of course, but since things always change the day after it’s approved, it’s hard to see the point in preparing something you know will change anyway…
Here’s a brief case for why it’s worth spending the time to prepare an accurate budget, and then 6 tips on making the process smoother and quicker:
First, the budget is not handcuffs limiting reaction to day by day changes, but is a baseline that makes trends and unusual events easier to spot. Some unusual events are easy to spot with or without a budget, as anyone involved with an emergency plumbing repair could tell you! But other items require understanding of what “normal” operations look like, in order to highlight unexpected trends or activities. Food cost inflation, unplanned staff overtime, or higher utility costs happen in the course of operations, and a budget will highlight when these categories are different than anticipated, allowing you to communicate these changes in needs to the board, donors and other stakeholders quickly and clearly.
Second, the budget ought to be used as a financial roadmap to bring together the board of directors, staff and perhaps even supporters. Rather than board members advocating for pet projects, department leaders prioritizing their urgent needs at the expense of other programs, or donors designating funds for special projects which draw organization focus away from core needs, a budget allows for shared agreement on priorities and focus. This streamlines future decisions, because you know which projects and items can be approved immediately, and which require further thought or need to be delayed for a future period.
So rather than being an annoyance or a perfunctory checklist item to complete, think about the budget as a way to support communication of expected vs unexpected operations going forward, as well as a method of getting clear agreement on organizational plans and strategy to bring operational focus for the budgeted period.
To assemble an effective budget with as little headache as possible, here are a few suggestions:
1) Start with past results, rounded up. History does not predict the future, but it can be a good starting point to make assumptions that are grounded in reasonable expectations. Rounding up accounts for some inflation of donations and expenses even before making further adjustments.
2) Adjust for items you reasonably expect to change. This is the area where accountants tend to nerd out and create multiple supporting worksheets with complex calculations. How detailed you get depends on the size and complexity of your organization, but don’t let perfect be the enemy of good. You can get a great result by thinking through major line items on the budget and deciding if you have reason to expect them to change:
- Were there one time gifts, grants or estate bequests that you don’t expect to receive again? If so, back those out of the revenue expectations.
- Are there any changes to staffing levels expected?
- Will pay rates for staff increase? (If you give cost of living and/or merit raises they will.)
- Will insurance costs (property and/or health) increase? (Yes)
- Did any programs or activities change during the past year, or do you anticipate changing soon?
This is also the time to collect input from other staff or departments as appropriate, so don’t think you have to singlehandedly have all the answers here. Some organization budget processes will be more collaborative, and others more centralized, but this is a good time to hear out your team’s vision for the future.
- What are your development staff telling you about their fundraising expectations and costs?
- Does your facilities department have upcoming preventative maintenance or upgrade needs?
- Are program departments seeing more or less clients, or are there upcoming plans which impact program revenue or costs?
3) Now, consider the appropriate time period(s) to use for the budget. Monthly is a good default, but in some cases quarterly may be fine. If there are detailed periods within the budget, estimate when income and expenses will occur by each month or quarter. Rescue missions can have 50% of donations within the October through December time period, so it would not be a good baseline to assume your donations will be received in equal amounts each month of a year. The timing of income and expenses can be the hardest to get right, so again, it doesn’t have to be perfect, just make an estimate for major categories or items like insurance that may be paid with annual payments, and then move on (or let your accounting staff nerd out and tweak to their heart’s content).
4) As you dial in the budget, decide whether you are more confident in your cost estimates or your fundraising expectations. Then use that total number to match the other against, adjusting categories to change estimates until the total revenue and expenses hit the targeted amount. With mature organizations you may be creating a zero based budget – no surplus or deficit for the year. But there are reasons you could target a different number, such as an organization that is putting aside extra funds for a future capital project. The suggestion here is just to sync up your donations and program revenues to the planned expenses and make sure you are not planning to spend more than you have, or bring in donor dollars without an idea how to use them.
5) Consider adding a cash budget to your package, starting with your ending cash in the account currently, then adding or subtracting the budgeted surplus or shortfall for the following month(s) in the budget to get the budgeted ending cash balance. This results in an easy way during the year to see how results are tracking. More importantly, it highlights the fact you expect to have more cash in the account at certain points of the year (such as the end of December after year end gifts are received). Just because you have a lot of cash in January, after a year end giving season, does not mean it is all available for special projects. A cash budget will show how much you anticipate having at a certain point in the year, so when you get there, you know whether you are over or under the amount needed for future operations. This helps greatly when considering special projects or unexpected items, so you don’t inadvertently spend funds you thought were extra, only to find out were needed in a future month.
6) Have someone else review the draft budget to point out any areas of concern or unreasonable expectations. This may be a trusted staff member or could be the board treasurer. Anything that involves estimates and prediction of the future is susceptible to bias, so having someone else to review can assist in avoiding major blind spots.
With these six tips, you can take what may seem like an overwhelming and useless task and turn it into a strategic opportunity to bring together your staff, your board and your donors. With renewed focus you can confidently handle operational decisions as they come, and identify unexpected needs and opportunities with greater ease, because you have a budget.
We would love to hear how you incorporated one or more of these tips to make your budgeting process simpler and more effective. If you’d like to share, or if you have more questions and need a third party to take a look at your budget, or even help structuring the format of the budget, please reach out to us here at CFO Leverage. We would be happy to hear from you.