By: Barbara Marrou, Associate
Why is it necessary to prepare a budget? Isn’t that the thing that takes an enormous amount of time and effort to make, and then is just forgotten until next year? If this is how you feel, then you are not using your budget to its advantage.
A nonprofit’s impact is determined by its ability to make good on its promise to deliver services to its clients. A budget highlights what is important to the organization. It provides guidelines for securing revenue and managing spending to support sustainable operations. A well-planned budget, based on and in support of your strategic and operational goals, will help you fund your organization’s mission and deliver on its promise.
Staff – Having a budget that the staff understands – and has helped create – encourages staff to be thoughtful in their actions and requests. Understanding that the budget reflects the major goals of the organization guides spending decisions that will keep staff focused on achieving their department’s goals.
Board – Conveying the budget to the board of directors – and revisiting it often – gives the board a better understanding of the operational needs of the organization. Maintaining constant awareness of the relationship between goals and budget allows board members to be better equipped to address those needs and uphold their fiduciary responsibility.
Funders – A clear budget process conveys your needs to funders while providing assurance that their funding supports the mission of your organization. When funders are presented with a new program idea – supported by a strong budget – they can feel confident that their funding will be well-managed.
A “zero-based budget” is exactly that: You start at zero expenses and put in your actual needs to operate. Rather than including expenses because “we’ve always done that,” this process supports analyzing and justifying each and every cost. Difficult? Absolutely! But it can be very eye-opening to find things that are not really necessary. You don’t look at previous budgets or last year’s expenses, you ask, “what do we need?” This is not a process to be used every year but certainly every few years to keep out those pesky expenses that sneak in and are overlooked.
Having a firm understanding of program costs, including costs per participant, will strengthen your organization’s position when seeking grants or other types of funding. Developing a budget for each program becomes key to achieving that understanding. One of the best exercises to determine program costs is to develop a “logic model.” A logic model is the process of identifying inputs, resources, outcomes, and impact, and based on the information you gather, it can help determine costs and the revenue needed to support program success. This exercise can help organizations to strengthen their existing programs and successfully create new ones.
Program-based financial information is useful for planning, management, and communications if it is comprehensive, accurate, and used consistently.
Preparation of a budget is initially a staff project, but it is the board that will set a timetable for budget preparation. After the initial preparation by the executive director and her/his staff, the budget should be reviewed by the finance committee and eventually approved by the board of directors.
Effective budgeting practices are systematically implemented over a specific timeline, and the process of making a budget should be undertaken during the same time period annually. The process can seem to be an overwhelming task initially, but eventually it will become routine and comfort levels will increase. A budget is not set in stone but should be reviewed often and corrections and modifications made to accommodate extenuating circumstances – such as we’re living through now!
The budget is a key communication tool for the board and it serves as the cornerstone for creating accurate and complete financial statements. It is essential that CEOs and executive directors develop master-level understanding of financial management practices – including budgeting – and that they develop the ability to explain ratios and variances. These skills will empower them to lead their organizations through proper fiscal and budgetary planning with fiscal integrity.
If your organization needs help with developing a budgeting structure and process, please call us.
Resource for developing a logic model: