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Posts Tagged ‘budgeting’

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In past posts, we’ve discussed a few of the different types of budgets and how each type might be used by a NFP. While the most common type of budget is an incremental one, the actual goal that you are trying to achieve determines the type of budget that will provide your board members with the clearest, most actionable information.

Budgets can also vary based on the length of time that they measure, such as monthly, interim and annual budgets. Individual budgets can also be made for a specific department or service project, while a master budget includes information and projections from all of your organisation’s individual budgets.

The following list outlines a few steps to take to help you get started creating your NFP’s next annual budget.

1. Pick a Budget Type. The first step in creating a budget is to decide what you are trying to measure and pick the corresponding budget type that will give your organisation the most useful information. For incremental annual budgets, figures and categories from the prior year’s budget form the basis for your new projections.

2. Start With Expected Revenue. As you begin to prepare your annual budget, you will likely want to start with the revenue section, as your NFP’s level of service, and the number and types of projects it offers the community, are dependent upon the type and amounts of funds that you expect to receive.

Include monies you expect to receive from all sources, including federal grants, donations, proceeds from fundraisers and/or ticket sales, other events and even unexpected or overlooked sources of income, such as rental fees or interest earned from other NFP assets.

3. Count Your Costs. Regardless of the budget type that you choose, you will want to separate your fixed and variable costs. This simple step enables your board to quickly see if they have enough revenue coming in to cover operations and what expenses that they might be able to lower through their direct actions.

Controlling costs enables your board to make the best use of the funds that they receive. Boards can also go a long way to ensuring their long term survival by controlling their costs.

4. Account for Project and Service Funding. This section of the budget allocates funds from revenue to specific services and projects. Depending on the type of budget that you choose, a portion of the fixed and variable costs associated with providing these specific services to the public might also be accounted for in this section of your budget.

5. Stay on top of Capital Budgets and Asset Management. Assets that are owned by the NFP must be properly maintained and cared for, and at some point, may need replacement as well. The costs associated with these actions should be accounted for in the budget.

Rather than directly using funding from the revenue budget, some NFPs use proceeds from investments in real estate, annuities, bonds, or other investment vehicles to help them to save to acquire capital that is later sold, with the proceeds being used to finance specific NFP goals.

Other NFPs seek to operate in such a way as to build cash reserves that can be later used to cover unexpected pitfalls, such as a loss of funding that might occur. Plans to save to cover the cost of purchasing, maintaining, and selling plant, equipment, and other capital assets, as well as plans to build cash reserves, should be included in this section of the budget.

6. Don’t Forget About Restricted Funds and Assets. Some grants and donations may come with conditions that restrict their use, so you will want your budget to include the revenue and costs associated with these funds separately from the sources of revenue and expense that don’t have such limitations.

For example, you wouldn’t want the sections of your budget reserved for general revenue and costs to include funds from sources that can only be spent to meet a specific need.  To ensure that these funds are spent properly, it is best to account for them in an individual budget that is then accounted for in a separate section on your master annual budget.

7. Frequently Review and Revise the Budget. Your board will likely want interim performance reports for each section of the master budget. Budgets should be reviewed frequently and action taken by the board so that they can quickly respond to any sudden changes and developments.

For example, the unexpected loss of funding from a long term donor or governing body should be addressed to prevent a shortfall in the revenue section of the budget and a corresponding drop in service level. If the loss of revenue can’t be made up, the NFP might look at cutting back on some of its variable costs or drawing upon its cash reserves or selling a capital asset in order to maintain its service level to the public.

While preparing the next annual budget for an NFP might seem like a daunting task for the volunteer treasurer, Admin Bandit’s software makes it easy for both the novice and the expert to stay on top of these and other common NFP accounting tasks. You can see just how easy it is to use by getting started today with our 55 day free trial!

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mouse-593297_640As a volunteer treasurer for a NFP, you may wonder just why your organisation needs a budget. After all, your charity isn’t an actual business whose primary purpose is to increase the business owner’s bank account. The funds that your NFP receives should go towards meeting your community’s needs as defined by your group’s mission statement.

Even though the main purpose of a charity or club is to meet needs rather than make a profit, it must still operate in a sound manner so that it can continue to meet its goals and objectives. Both individuals and businesses use budgets to help them better control their expenses, manage their cash flows and create plans for how they will meet future obligations and goals. A realistic budget is also the key to helping your board members have better control over your NFP’s finances.

Budgets are Planning Tools That Help you Meet Your Duty of Care

Having a budget helps your board to wisely manage funding and other resources received by your charity or club. It also helps your board to be able to make strategic plans to ensure your organisation remains operationally sound and able to fulfill its mission statement for many years.

A budget is basically a plan that maps out what funds are expected to be received, when they will be received and how they will be used to further the group’s goals and mission. A budget doesn’t just provide greater control over the NFP’s finances, however.

Creating and approving a realistic budget can also be seen as fulfilling one’s legal duty of care to properly manage the funding for the public good. As we’ve discussed in a prior post, there are negative personal, professional and public ramifications when NFPs and their members fail to follow their duty of care.

Why Budgets are Part of Good Governance

Having a budget is also part of following good governance procedures, as it allows the board to plan how to reduce risks to their reputation and work as well as how they will comply with any tax and superannuation requirements. Along with your NFP’s minutes, the budget, balance sheet and other NFP documents are all records that help to explain why your NFP’s board members have made certain decisions. The Australian Tax Office (ATO) states in Section K of its NFP governance checklist that it’s good practice for NFPs to keep their minutes and other records explaining their actions for at least five years.

We hope you found this information helpful. In our next blog post, we are going to discuss how you can best create a budget, so stay tuned.

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If you are looking for some excellent resources and support for your committee of management then have a look at this website Online Learning for Sports Management.  Even if your organisation is not in the sporting field you will still find the information incredibly useful.  The main areas covered on this website are:

  • Boards & Committees
  • Budgeting
  • Financial Management
  • Event Management
  • Funding & Sponsorship
  • Legal Issues
  • Strategic Planning
  • Sport Industry
  • Policy Development
  • Service Delivery
  • Risk Management
  • Computer Help

Under each area there are great examples and additional information that explains the issue in more detail.  There are over 500 pages of information that is free and some more detailed resources such as templates that can be downloaded for a very small fee.

Each topic is covered in comprehensive detail with subheadings providing more specific information.  For example, the area on Boards & Committee has about 16 separate topics that cover the role and purpose of a management committee, what are the relevant legal issues, running and managing meetings, fiduciary duty and the constitution are just some of the topics covered.  All the information is written in a manner that is easy to read and understand.

The other feature of this website is that it supports students and teachers and has an online learning component that includes exercises and tests.  At the end of each component you can complete an online test to check your understanding of the topic.

If you are a treasurer then in particular have a look at the Budgeting and Financial Management sections.  These sections provide a great overview of accounting, how to prepare a budget, cashflow forecasting, monitoring financial performance and includes an area on embezzlement that is worth reading.

Take the time to visit the Online Learning for Sports Management  website as you are sure to find some valuable and useful information.

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The idea of budgeting is alien to a lot of people when it should really be a natural part of their way of life.  After all, you aren’t working for the sheer fun of it, are you?

A budget is your financial plan for the future, not something that is designed to restrict your present lifestyle.  It’s not like a diet where you have to eliminate the things you love.

Your income needs to support your lifestyle and set you up for the future, but if you aren’t taking care of your money it will just disappear.

Did you know that according to the Australian Bureau of Statistics, out of 100 people over 65 there is likely to be:

  • 1 wealthy
  • 5 financially independent
  • 16 still working
  • 24 dead
  • 54 dependant on welfare or charity

How do you want to live when you are older?

When you are thinking about your career and personal development, you need to include financial development, too.  After all, it’s a skill.

If you are new to the whole idea of budgeting, have a look at this clip from Investopedia which explains it in simple terms.

Then, pull out your calculator and start making plans.

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