Not-for-Profit Budgeting
Developing a budget may range from a simple to a complex process depending on the organization. Gathering the requisite information can be challenging; department heads, program directors, the finance department and the board of directors/trustees all should be involved in performing this crucial task.
Some of the benefits of preparing a budget and the pitfalls an organization may encounter in preparing a budget are as follows:
Provide a tool for financial assessment
The purpose of a budget is to serve as a planning document and as a tool to monitor and control expenditures. Management and the board can use the budget to assess their financial progress during a specific period in time; therefore the health of the organization would be quickly identified, and steps could be taken to correct any problems on a timely basis. However, if the budget is not prepared based on credible information, then financial expectations may not be realistic. Also, while preparing the budget, annual goals and objectives within the organization’s mission can be discussed to ensure that all parties are on the same page since differences in understanding could arise, especially when resources may be scarce.
Determine needs for specific projects
Program or project managers are most familiar with a not-for-profit’s programs and services, so they are most likely to prepare budgets that reflect the financial needs of the program. The budget provides a mechanism to identify the anticipated costs associated with specific projects in an organized way, including personnel costs and other expenditures necessary to carry out the implementation of the project. Staff would be held accountable for maintaining costs within the budgeted framework, completion of the project and responding to inquiries regarding variances from the original budgeted plan.
Comparison of budget to actual
When a budget complements the accounting system, the expenses recorded in the general ledger can be readily transferred to the budget line items to provide comparative information to management and the Board for review. It is necessary to make sure that all the expenses in the general ledger relating to operations are captured in respective or summarized line items in the budget or it may erroneously appear that the organization has underspent their budget when that is not the case.
Analysis of budgeted costs with programmatic results
Certain budgeted expenditures should be reflective of the anticipated underlying service units. In this way, dollars spent would be measured against performance goals and an analysis of efficiencies could be determined based on those units of measure. For instance, closely related expenditures should fluctuate based on an increase or decrease in service units. If no change occurs, then an analysis should be conducted to determine if no change is appropriate. Also, a determination may need to be made to decrease service units if an analysis shows that a decrease is necessary to stay within budgeted parameters.
Budget modifications and monitoring
Budgets should be reviewed at least quarterly and modified whenever variances are determined to be significant to the overall goals and anticipated achievements of the organization. Obtaining timely and accurate reports of expenditures is crucial in determining if a modification is needed. Reallocating the budget categories periodically would present a more realistic picture and indicate where the organization’s resources are actually being spent. Without this monitoring and reallocation, expenditures that are reimbursable from funding sources may not be properly reported and received. If flexibility is not allowed at the budget line item level and budget modifications are not prepared, then the organization may lose a portion of anticipated funding.
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