Budgeting

Nonprofit organizations often prepare yearly budgets for operations with numbers for the following year. Many develop budgets based on income first and then expenses, while others start with expenses and then work on the revenue -- it depends on the nature of the organization. In order to develop a good budget you need to be realistic and detailed-oriented.

The first step is to print out current revenue and expense detailed report by account and use that as your basis for the future. For example, if you see rent expense of $1,000 a month, then you should budget for this amount for the following year, unless you know that the rent will increase or decrease in the near future. You need to look at each account and try to forecast the best you can about the following year. This type of work is often done during the last months of the prior year, so that any trends or new information is included in the budget. Although budgets are usually done once a year and then the numbers remain static, there are instances where budgets are changed and re-approved by the Board during the year. This may happen when a nonprofit loses or gains major funding, making the original budget obsolete.

Nonprofits receiving government funds incorporate grant budgets as their own. Organizations also need to consider government cuts and how that would affect operations. Nonprofits should always budget for more revenue than expenses to allow for cuts and unexpected expenses. Once budget numbers are approved by the Board and entered in the accounting system, the next step is to get actual vs. budget numbers in reports. Be sure to look at budget variances for the month and year-to-date. If you only look at monthly numbers, you may miss variances that may be small on a month-by-month basis, but significant for the year. For instance, if you see that your revenue is down $10,000 this month, it may not mean much, but if you compare year-to-date actual to budget numbers, you may have a $100,000 hole in the budget that needs to be corrected by using funds from prior years or by cutting down expenses.

Note that many nonprofits count on restricted funds to operate and that's when confusion may starts up. When developing an operating budget, differentiate between restricted revenues and others and be sure that donor documentation supports the decision to use restricted funds. You cannot unilaterally decide to use restricted funds -- the donor must have given express permission for the money to be used a certain way. Some organizations have separate budgets for capital expenditures to be used in major construction or other major project. Keep the operating budget separate and review both,l looking for discrepancies and double counting. For instance, you may receive funds to construct a school and that should go towards the capital budget only -- not towards operations. In some cases, the same funding may show up in two different budgets by mistake. Look out for those that can create a major problem.