Nearly every organization or group has some sort of budget process that they undergo. When budgets are treated as friendly tools, they end up being one of the most meaningful planning methods. On the other hand, when budgeting becomes a meaningless exercise that is largely ignored, it often becomes the missing ingredient in effective strategic planning. Budgets should be used to help analyze and determine an organization's needs, priorities, strengths and weaknesses. It should begin with a thorough analysis of what an organization is doing right, what is doing wrong, what too much money is spent on, and what more monies need to be expended. Far too many organizations approach the budget process simply by taking the past budgets and adding an across the board (or similar procedure) percentage. When budgets are used wisely, they help open up the eyes of an organization to the realities, needs and priorities, as well as their strengths and limitations. The wise budget leader reviews all revenues and all expenses, and then puts them into perspective with the needs and priorities. The first rule of creating a meaningful budget should be that with the exception of contracted, fixed expenses (and even at times those need to be reviewed and adapted), every item on both the revenue and expenditure side should be carefully reviewed, evaluated and analyzed.
1. In creating a meaningful budget, all estimates on the revenue or income side should be extremely conservative. Although they should be realistic, they should never include hoped - for estimates for items like fund - raising revenues, etc. These should be budgeted for based on averages, so as not to end up in the hole at a later date. On the other side of the budget, expense/ expenditures should be using near worst - case scenarios, so that there are no unpleasant surprises. In addition, organizations must never approach the budget as an excuse to waste funds or spend on items that are not necessary, because any surpluses can be better utilized by putting them into reserve funds for future relevant and important needs.
2. When creating a budget, one of the most frequently overlooked areas are in creating contingency reserve funds, built right into the budget. These funds/ reserves must be fully funded no later than the midpoint of the fiscal year. Some reserve funds that should be included include Maintenance Reserve Funds, and Emergency Reserves. These funds must be carried over from year to year, so an organization is prepared for the eventual and inevitable contingencies that will arise.
When budgets are used to plan the priorities and direction of an organization, the group invariably runs more smoothly and effectively. Those groups that use budgets as they should be used, soon learn that the budget has the potential of being the organization's best friend and most essential tool.