Annual Budgeting Process

Each month, Nonprofits Assistance Fund hosts the Financial Management Network.  These free, informal gatherings are opportunities for members of the nonprofit community to get together to discuss different financial topics and network with peers. Key takeaways from these discussions will be posted and form an archive to help promote healthy financial practices.

Annual Budgeting Process (9/23/2009)

This is a topic we schedule every fall, because nonprofits operating on a calendar fiscal year are hard at work on the next year's budget.  Last year's notes cover some budgeting basics and have other useful information to help you get started.

Four Questions to Consider

  1. What information is necessary?
  2. How is the budget timeline determined?
  3. Who is involved and in what way?
  4. How do you deal with uncertainty?

Getting Started

  • 10 Step Annual Budgeting Checklist
  • Start with historical data to get a sense of what is realistic
    • When using information from previous years, make sure to use the accurate actual numbers, not your original budget. You do not want to carry forward any variances.
    • Make projections about the rest of the current year (so you can compare apples to apples)
  • Determine your goals - a budget is a planning document to prepare your organization for the next fiscal year
  • Set priorities ahead of time
  • When looking at income sources, try to assess the probability of receiving the funds

Who is Involved?

  • Staff leadership can help you draft a budget
  • Work with other staff members to get the most accurate budget figures
    • Program managers know their direct program costs better than anyone
    • Development and communications staff know the fundraising and marketing costs
    • Financial managers use this information and their expertise to put together the most useful budget
  • Small organizations may outsource accounting and may have few (if any) staff members
    • Executive Director and board/finance committee may make all the nitty gritty decisions and provide all of the detailed information

Working with the Finance Committee

  • Typically the finance committee and board are involved
    • At the beginning of the process to set organizational goals
      • Role of the board (including finance committee) is to provide strategic direction and set priorities for the organization, which used during the budget process
      • Role of the staff is to put numbers to these goals by drafting expense and income budget
    • At the end to review and approve the budget
  • The finance committee fleshes out concerns of other board members - address any questions at the committee level so the board application process goes smoothly
    • Focus on the budget assumptions - important to review and discuss them
      • Risk tolerance and percentage of unsecured funds in budget
      • Level of board giving 
  • How engaged should the finance committee be?
    • Don't want to micromanage, especially if the board focuses more on governance than operations
      • However, some boards that are very involved in the organization's regular operations can be hands off when it comes to budgeting
      • One way to increase their engagement is to meet with members one-on-one, rather than as a committee. It can be easy to see something as someone else's responsibility when it's a larger group.
    • Unless there is a glaring issue, their role is to oversee and review the process, not to draft the budget
  • Is there a budget policy, as part of a larger financial policy or in the by-laws?

Budget Timelines

  • Balancing act - you want to have the most accurate and up to date information about your income and expenses, but you also need to start planning well in advance
    • If there are significant changes to your organization's income, you can make changes to the budget
  • Work backwards when determining the budget timeline, with the goal of having a board approved budget before the fiscal year begins
    • Meet with finance committee to go over assumptions and questions in detail
    • Board review 2 meetings out, so there is time to make any changes well before the fiscal year starts
    • Board approval before the start of the fiscal year (ideally the prior month)
  • For organizations with a calendar fiscal year, scheduling meetings in November and December can be very tricky
    • Put budget meetings on the board calendar well in advance
    • Budgeting can be a planning tool to guide board training (as well as a tool for managing your organization)

Dealing with Uncertainty

  • In this ecnomy, it's hard to have a high percentage of secured funds
    • Everyone is dealing with uncertainty around income levels
    • Work hard to have as much secured funding as possible before send budget to committee
  • What level of certainty is your organization comfortable with?
    • Some organizations only include confirmed grants
    • Others include probable funds
      • Changes in foundation payouts and funding priorities impact the probability of receiving new grants
    • After unallottment, the definition of a confirmed grant may be different
    • Be very clear about the underlying budget assumptions and make sure everyone is on the same page
  • Have a realistic ballpark of your anticipated income
    • Use recent and historical data to assess the probability of different income sources.  How has the recession has impacted them?
      • Foundations - have they changed their priorities?
      • Individual donors - have you maintained thiese relationships?  Do you know how they are faring and what are the giving priorities?
      • Corporate philanthropy - how is their business doing?
      • Earned income - has the recession affected your business?

Alternate Budgets and Scenario Planning

We encourage organizations to plan for different scenarios during the budgeting process. Taking time on the front end helps you make strategic decisions about what to do with higher/lower revenue and/or expenses.

In this uncertain economy, scenario planning is especially important.  By thinking through your options, you will be better prepared for a crisis, able to make decisions about cutting expenses thoughtfully and not endanger the organizations and its core operations.

  • Use our cash flow template to project your cash receipts and disbursements for each month

A step by step guide to nonprofit Scenario planning

  • Consider possible changes to your organization's income
  • Offset these revenue decreases by reducing expenses
  • Weigh the impact on individual programs and the whole organization
  • Identify triggers, when should you implement plan B or c?

This information will help you adapt to changing circumstances, understand the impact, set priorities, and sustain your mission.

Use our Scenario Planning Example as guide:

For more on scenario planning, check out Contingency and Scenario Planning - What’s the Difference and How Do Nonprofits Get Started? from PhilanTopic.

Budget Revisions

Similar to scenario planning, it is important for organizations to compare actual income and expenses to the budget. 

  • Review actual numbers compared to budget monthly
  • Consider using rolling projections, to help your organization make adjustments in a planful way
  • Add a year-end projection column to monthly reports to help staff estimate what the end of the year will look like
    • Consider the implications of any variances on the rest of the year
      • Compare to your scenario planning work - do any of these changes trigger changes in how you operate?

official budget revisions

Different organizations have different policies regarding official budget revisions.

  • Some groups feel strongly that the budget is a document that should not be officially altered, although how it is implemented may change.  
    • Adjust within programs to function with less revenue
    • Significant variance on the report can prompt a conversation at the board level
  • Others have significant contract funding and may need to hire or lay off staff depending on the outcome of these contracts. These financial managers would have a hard time using a budget that did or did not include these funds.
    • The timing of these contracts may not fit the timing of your fiscal year
    • Some nonprofits specifically state that they will revisit the budget quarterly or at the half year point and make adjustments as necessary.

If You Revise the budget

  • Depends on funding circumstances
    • How much do your funds fluctuate?
  • Do these changes in income/expense change your business model?
    • Staffing needs
    • Program mix
    • Stimulus funds - depending on their fiscal year, an organization that received funds may not have them in the original budget
      • For organizations with stimulus funding, this may be one-time money. Building capacity to deliver a program is a long-term project, so thinking through the program budget (and possible alternative funding sources) is important.

Budgeting as a Fiscal Agent or General Contractor

Organizations that serve these roles can receive funds that move on to other nonprofits.  Some funds pass through your organization before you disburse them, but other times you may subcontract with other groups to deliver services.  What is the best way plan for, record, and monitor these funds?

  • Who has discretionary power over the funds? 
    • Pass through funds/serving as a fiscal agent
      • Consider holding these funds in a separate account with its own line item 
    • Subcontractors
      • If the funds are part of a grant contract, include the receipt as income and payout as an expense
      • Remember to also record them as temporarily restricted funds/funds released from restrictions
  • Be consistent across documents - budget, 990, financial statements, audit.
  • As a general rule, we suggest talking to your auditor about any atypical funds.  This way you record them properly on the front end.
    • Mention them in the footnotes to clear up any confusion

Discussion Archive

Read notes from other Financial Management Networks: