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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