The Importance of Budgeting
Are we meeting our budget? Do we have enough cash? What is the budget for this project? These questions are asked regularly at nonprofit organizations. Whether it's a board member doing his or her job, or employees determining their spending limits, accounting personnel are frequently asked about budgets.
The ability to budget effectively is a very important part of being a successful nonprofit organization. A budget can be useful in setting standards of performance, motivating board and staff members, and providing a tool to measure results Fulfilling the organization's mission is the main goal, and budgeting makes it possible.
The budgeting process begins with zero-based budgeting, which is recommended at least every two years. Starting at zero and determining the needs of each department and program can provide a far more accurate budget than allowing for a simple incremental increase each year. Additionally, budgets should be conservative. Expenses should be overestimated by as much as 10 percent, and revenues should be underestimated to allow some flexibility.
Involving board members, fundraising staff, accounting staff and other department heads is critical in this process. This allows for a concentrated look at the organization's mission, while considering the projected revenues and resources to meet those needs.
Budgeting also plays a critical role in strategic planning. Many factors must be considered when outlining future financial goals, including:
- Technology needs
- Capital improvements
- Overhead needs
- Planned giving and capital campaign revenue
- Borrowing funds
As software and hardware needs become more sophisticated, annual budgeting is a must. Budgeting for technology requires organizations to realize that since computers must be replaced essentially every three years, it makes sense to budget replacing one third of your computers each year. Unless you plan ahead and include the costs of technology changes in your budget, you may find your organization going without the benefits of technology or expending significant amounts of money in order to upgrade their technology.
Determining the funding needed for capital improvements is as important for many nonprofit organizations as it is for for-profit. What are the expansion needs of the organization? Are leasehold improvements reaching the end of their expected lives? These are all questions that may be answered easily; however, if they are not considered during the budgeting process, your organization may find its expenses far exceeding the funds set aside for these projects.
Meeting Overhead Needs
As many organizations have recognized over the past year, utility costs are certainly not a constant factor. Although it is not possible to predict fluctuations in variable costs such as these, your organization must consider inflation and other increases in overhead costs. In addition, it is important to review trends and determine if certain costs are unnecessary. Many organizations are driven by program grants, which often do not cover overhead costs and therefore may cause a deficit situation.
Consider an unrestricted giving campaign. By involving the fundraising personnel, you can discuss this option and the estimated contributions that can be expected. When considering this type of fundraising, consider planned giving programs and soliciting for specific operating costs. Ask a donor to take over a monthly bill to help cut your overhead. Although nonprofit organizations are mission driven, overhead costs can get out of control if not closely monitored and budgeted for.
Planned Giving and Capital Campaign
Although budgeting seems to involve an in-depth look at an organization's expenses, it is imperative to consider future inflows. Revenues from planned giving and capital campaigns can be substantial. During the budgeting process, it may be very obvious that shortfalls in future periods will require substantial fundraising. Maybe it's time for your organization to organize a capital campaign or bring someone on board to establish planned giving arrangements. It all depends on what your organization's needs will be over the next few years.
Many nonprofit organizations never consider borrowing as part of their financial strategies. However, when there is a legitimate need for it, the use of borrowed funds can allow organizations to place less reliance on the timing of donations and fundraising events. If your organization is considering the purchase of equipment, remodeling or purchasing a new building or needs additional funds to cover operations during a period of low cash inflows, a line of credit may help your organization to function more smoothly.
Budgeting is an ongoing process. Budgets should be revised throughout the year and allow for increases or decreases in the budget as necessary. Not only should the board monitor the budget, management and staff should constantly scrutinize actual results in comparison to the amounts budgeted. It is important that procedures are in place to make sure that the difference between what was budgeted and what actually happened are being appropriately addressed. A well-prepared budget can help determine where the organization has been and prepare for its future.
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