Budgeting Tips for Non Profits

WHAT IS A BUDGET

A budget is a plan that identifies the financial resources required to achieve specific objectives i.e. for an organization or a department. Once constructed, this plan assists staff and board in managing the organization both programmatically and financially throughout the year. It is a key management tool for planning, monitoring, and controlling the finances of an organization.

PURPOSE OF A BUDGET

Budgets can serve a number of important purposes, including:

  • Monitoring the income and expenditures over the course of a period (or a specific project time frame)
  • Forecasting income and expenses for an organization, projects, including the timing and the availability of income
  • Providing a basis for accountability and transparency.

In addition, budgets are essential tool for funders . They provide an understanding of your work. I.e.:

  • How are you planning to use the grant funds?
  • What are the other sources of funds for the work?
  • Does the budget reflect local costs?
  • Do the expenditures correspond to the activities?
  • Does the budget fall within the guidelines of what the funder can support?
  • What percentage of overhead expenses (such as salaries, rent, utilities) is included in the budget?

KEY QUESTIONS TO BE ADDRESSED WHEN PREPARING THE BUDGET

  • When preparing the budget, the following questions need to be addressed:
  • Who should be involved in the process of preparing the budget?
  • What resources will be required to achieve your planned goals?
  • Where will the funds come from?
  • What will be the budgeting period?
  • What external factors should you consider

THE BUDGETING PROCESS

The process of preparing a meaningful and useful budget is best undertaken as an organized and structured group exercise. A schedule of key action and decision points in the process should be establish to allow for adequate time for information gathering and decision making.

How long the process should take and who should be involved varies depending on the management style and complexity of the organization. However, the time allocated should be adequate enough for all the departmental heads and technical teams to provide their input and for the board to approve the budget before the start of the new year.

The budget process involves answering the following questions:

  • What are the objectives for the period?
  • What activities will be involved in achieving these objectives?
  • What resources will be needed to perform these activities?
  • What will these resources cost?
  • Where will the funds come from?
  • Is the result realistic?

STEPS IN THE BUDGETING PROCESS

Step 1: Planning the Process

  • Identify the team members who will be involved in the budgeting process
  • Agree on who will coordinate the budgeting process
  • Agree upon key definitions, assumptions and document formats;
  • Set timelines and key deadlines;
  • Determine and schedule any training or key meetings;
  • Clearly communicate responsibilities, expectations and deadlines to everyone involved;
  • Explain and distribute document formats and assumptions.

Step 2: Preparation Phase

  • Identify and plan your activities for the period based on objectives and assumptions;
  • with your staff
  • Cost the activities by category. Use previous period budgets or actuals as a guide;
  • Adjust previous period budgets or actuals for cost of living or inflation;
  • Estimate your income from the different sources of income
  • Analyze the difference between your projected income and expenses. Make adjustments to balance your budget by either exploring option to reduce your expenses or increase your income.
  • Develop a contingency plan for the unexpected, such as if you don’t reach your income target at the anticipated time, or if there are price fluctuations.

Step 3: Review and approval

  • Present your draft budget and cash flow statement to staff, your governing board, or other key groups within your organization for inputs and endorsement. Being transparent about your budget with the key stakeholders helps to legitimize your organization.
  • Make any changes and finalize your income and expenses budgets, as well as the timing of your expenditures and income.

Step 4: Monitoring and review

  • Regularly (monthly or at least quarterly) monitor the progress of your budget. Preparing budget Vs. Actual compression may do this.

Keys to successful budgeting process

  • Clearly identify organizational goals and objectives that are aligned with the mission and strategic plan.
  • Determine the financial resources needed and available to achieve your objectives. Be realistic; don’t under or overestimate your income or expenses.
  • Involve the relevant staff and board members in the process to improve accuracy of information and commitment to the plan.
  • Don’t rely on memory. Document your assumptions and formulas. This will be very important in managing the budget throughout the year.
  • Present as accurate a budget as you
  • When monitoring your budget, prepare a report on any differences with the proposed budget and the actual expenses.
  • It is important to present an accurate budget and to resist the temptation of underestimating your expenses because it can hurt your organization. This is especially true if you are unable to complete the planned activities due to lack of funds which can result in communities losing faith in your organization’s ability to deliver and funders question your planning and budgeting skills.
  • Cost estimates should be reasonable and accurate. Inflating (or overestimating) your budget can also create a sense of mistrust with the funder and beneficiaries. If you anticipate any deviation from your approved budget provide written justifications and obtain approval before hand from your funders.
  • Finally, when reporting back on your expenses to donors, report on any differences with the proposed budget and the actual expenses. Make sure that what you spending is reasonable and is directly related to the original objectives of the proposal. Where there are variances between you approved budget actuals, provide written explanations with your financial reports.
  • Finally, it is important to keep budget notes to record the budgeting process as well as any assumptions made during the budget development phase as this will explain how and why budget calculations are made. Combined with the budget, notes can serve as a clear guide for your organization’s spending and decision-making. Budget clarity and notes also mean that as circumstances change, revisions to a budget can easily be made to reflect changing realities. It also helps in case the activity is audited.

Leave a Reply

Your email address will not be published. Required fields are marked *