The Annual Budget

As the calendar year draws to a close, non-profit executives are focused on end of the year giving. While grants, gifts and fundraising events are extremely important; thoughts should also turn to next year’s budget.

If you’re like most Executive Directors, you’re already thinking about next year and what you want to accomplish. But strategy without numbers is just noise. How much will next years accomplishments cost? Where will you get the revenue to pay for all of those accomplishments? Those two questions are at the heart of the non-profit budgeting process. The notion is: if it’s not in your budget, you can’t spend it.

Budgeting Considerations

Generally, the annual budget is prepared by the Executive Director in conjunction with the Treasurer of the Board of Directors. Larger non-profit organizations will have a finance department and a CFO in charge of the budgeting process. In either case, there are some basic questions that need to be asked. Where should you begin the budgeting process? How much credence should you give to last year’s numbers? From whom should you gain input?

Most budgeting sessions are a rather top down affair. While top down processes for anything are not very popular anymore, they can be very efficient. At the heart of this traditional approach to budgeting is the assumption that things will remain relatively the same from year to year and that the executives and board members understand all of the complexities of the various departments.

While this is quite possibly true, and the top down budget strategy has worked for many years, our current economic climate requires us to question everything. Depending on the size, complexity and culture of your organization, this may or may not be a good approach. If you create a budget based simply upon historical numbers and what the top few executives in your organization think, you may be building last year’s mistakes into next year’s budget.

The alternative is a method sometimes called, Zero Based Budgeting. The premise behind ZBB is that no costs or activities should be automatically included in the coming budget period simply because such costs and activities occurred in the past. It is always a good idea to examine and justify all of your planned revenue expenses, but the complexity and sheer size of some organizations can make this very difficult. That is why ZBB is really a bottom up strategy.

Part of the challenge of non-profit budgeting is the fact that revenue generation is completely separated from most of the activities of the organization. Most non-profit constituents do not pay for services, or if they do (as with a museum) they only pay for part of it. A substantial amount of non- profit income comes from fundraising. Therefore, revenue generation is completely separated from operations. This can create a challenge for Zero Based Budgeting. But it can also create an opportunity. Every person in a non-profit organization is part of the fundraising team, at the very least because of the fact that how they deliver services and operate the program has a large influence on donors. One nice thing about ZBB is that it gives each member of your non profit team a chance to think about the expenses they generate and connect that to the contribution they make towards the funds actually raised.

Other things to remember about budgeting:

• Start early and work in short bursts. You’ll have a much better product. Doing a budget under a tight deadline is recipe for a bad budget.
• Get plenty of input from the people who will have to live with the budget. Meeting with several different levels of the organization will help create a well balanced budget.
• Take notes on everything and hold on to them. You will never remember how you came up with that number for “web-marketing” unless you keep good notes. Efficient note taking will also help support reasoning for the changes in the budget from year to year.
• Make use of your financial software. Re-keying is one of the major causes of mistakes. If you can enter the budget into your financial software while you are making it, you will avoid mistakes and make it easier on yourself. There are plenty of user friendly software programs that will not only ease the budgeting process, but will also help organize all of the finances throughout the year.
• Receive board approval prior to the board meeting. Don’t spring the budget on your board at the meeting for the first time. Give them the budget well ahead of the meeting and make follow up calls to make sure everyone is okay with the numbers. No surprises. Budget discussions can get ugly.
• Make use of your budget once it is ratified by the board. Monthly reviews by the ED and Treasurer, and quarterly reviews by the full board are a must. Referring to the budget throughout the year will help stay on target and meet the annual goals.

Another user friendly budgeting tool that can be very useful in projecting next years budget is by doing a Budget Deviation Analysis. Don’t let the name scare you, as it can actually be quite simple. Deviation analysis takes into effect the numbers that were budgeted for current operating year and the actual expenses and revenues that occurred. This is a great way of tracking how accurately you budgeted last year as well as pinpointing problematic areas in spending and other areas of the budget. Budget deviation analysis contains columns as simple as:

Actual for Month	Budgeted for Month	Difference	Deviation %
		(Budgeted - Actual)	(Difference x 100)

This can be a quick easy tool to use in tracking the past impact of each years budget.

In conclusion, a detailed, well planned budget will make next year’s operations easier. Also, it will please your donors, your board members, and give your employees a sense of ownership. If you are thinking about changing your method, the Giersch Group can help you decide which method will work best you. Keep in mind that many grant readers will look at your budget before they read anything else in the grant proposal. Everything that is included in the budget should be considered and justified. Start planning now for a jump start on next year.

Articles for Further Reading

1. Basic Guide to Non-Profit Financial Management This website provides you with the basic information to keep your non-profit financially healthy. http://www.managementhelp.org/finance/np_fnce/np_fnce.htm#anchor2890212.
2. Grant Writing tools for Non-Profit Organizations While looking at next years budget, look ahead for new grants will help start the year off on the right foot. http://www.npguides.org/links.htm
3. Non-Profit Financial Software Looking at this site will give detailed benefits on using a software that fits with the needs of Non-Profits. http://www.findaccountingsoftware.com/guides/industries/nonprofitsoftware/

For more information, please visit the Giersch Group at www.gierschgroup.com or contact us at prosper@gierschgroup.com.