Budgeting: A Guide for Small Nonprofit Organizations
Introduction | Top
The need for each nonprofit organization (NPO) to budget both its expectations of income and the attached costs and expenses is one that is easily recognized. However, most guides on the subject are written with the large organization in mind.
Every volunteer brings to a small NPO the enthusiasm and interest necessary to do a good job. Most small NPOs lack the funds necessary to seek and pay for professional guidance in the business and larger nonprofit world.
This guide is written to present the theories and practicalities of budgeting for the small NPO staffed by volunteers whose expertise does not always correspond with the budgeting needs of the organization.
In this guide, Goodworks, Inc. is a hypothetical nonprofit organization that receives funds from grants, the general public and sales of T-shirts to help with the problems of runaway teenagers. The example of Goodworks, Inc. should provide guidance for most NPO budget situations.
Selecting the Budget Committee | Top
A budget is a planning tool for the NPO. The budget committee should reflect the collective knowledge of the organization concerning the goals and objectives for the period in question. Volunteers who serve on the budget committee also should have the following qualities:
- A familiarity with prior years' activities and the changes that are contemplated in the year(s) to come
- A desire to serve the organization as a whole rather than to lobby for a particular project
- A knowledge of ordinary budgeting, whether on the personal or business level
- Hands-on experience with budgeting
While the qualities listed above are desirable, their absence should not preclude excellent service by volunteers who are otherwise interested and dedicated.
The Task of the Budget Committee | Top
The task of the budget committee is to develop the budget for the current year (or current and future year if it is a multi-year budget). The steps in developing the budget is as follows:
- Develop list of objectives or goals for the current year (or current and future year)
A familiarity with prior years' activities and the changes that are contemplated in the year(s) to come
- Estimate the cost for each objective or goal. Previous year’s actual expense and budget can be used as a starting point. If there was no budget for the previous year, the actual expenses can be used as a starting point. If the goal involves new programs for which last year’s expense cannot be used, estimate cost by listing out in detail all of the expenses involved in achieving that particular goal.
- Estimate the expected income that will be generated
- Compare the expected income to the estimated expense in achieving the goal
- Develop the final budget
The need to present the budget to the board for approval will be the overriding constraint in planning the time frame for the budget process. There must be time to consider, question and change the budget both before and after the presentation to the board.
Setting Budget Priorities and Realities — Revenues | Top
A budget may start in one of two places. One is to plan based on the amount that must be spent to fulfill the goals and objectives of the organization.
This method unfortunately tends to encourage a "pie in the sky" attitude, where so much is needed that the revenues necessary to pay for such a plan are not available even in the most optimistic of projections. This is when reality must be considered. The budget committee will need to examine the reasonable expectations of revenue. Each potential source of revenue must be examined to determine possible enhancements in the future. The availability and probability of grants from outside sources must be discovered. Together with the possibility of grants, there must be a measurement of the costs of such grants.
Do separate accounting reports need to be provided to the grant-giving organization? Are the funds restricted to a particular purpose? Does the grant provide an allowance for overhead expenses of the organization? And must the organization be audited in order to qualify for the grant or to account for it? Does the grant allow for the creation of a program that cannot be carried on financially after the grant funds are used? Will the grant lead contributors to believe their contribution is not needed? Can the grant change the tax status of the Organization? Sometimes the cost of revenue may be more than it's worth.
There are grants that are unrestricted. They may match contributions from outside contributors, or they may be from small, local charities that are interested in your type of program. Libraries are excellent resources for this type of information.
What are the expectations of contributions from the public? Be realistic! Is there a history of increases in past years? Has a major contributor had a good year or a bad one?
What are the fund-raising possibilities of the organization itself? What are the costs of fund raising? What are the legal and tax implications of selling goods and services to raise funds?
Are "suggested donations" better than a fee for a production or fund raiser? Some of these questions require knowledge of local and state laws, but the best answers may keep the organization out of trouble later.
Setting Budget Priorities and Realities — Expenses and Costs | Top
The opposite side of revenues (income) is expenses (costs). Sometimes revenues and expenses are tied together, as in fund-raising projects that generate revenue at a certain cost. Excess revenue over expenses can usually be used to cover other expenses of the organization, e.g., programs that do not generate revenue and administrative expenses. The by-laws of the NPO also need to be reviewed for requirements that may place an undue burden on the organization, i.e., the requirement to have an annual audit.
Expenses are generally associated with those disbursements that do not have a future value, e.g., postage, telephone service, etc. Costs are associated with items that have a future benefit, e.g., desks, computers and other assets. These also are known as capital expenditures. In either case they must be budgeted.
As noted in the revenue section, some programs are funded entirely by grants. The budgets for specific grant programs are made at the time of the grant application. These budgets should include not only requests for the specific costs of the program, but also enough to cover the internal costs of administering the program if the grant is awarded. Many a program has been granted based on direct costs, without any consideration of the indirect costs of telephone, transportation, stationery, postage and the incidentals that can add up quickly and doom a well-planned effort.
Planning for programs that are to be covered by general contributions and unrestricted grants entails a budget that has some elasticity.
When to Prepare the Budget | Top
A budget is a planning tool and should be prepared well in advance of the period of the actual performance. Plenty of time should be allowed for presenting the budget to the board of directors for approval, and for making changes. After your hard work preparing the budget, it may be hard to recognize good suggestions for improvement, but you must be willing to go back to the drawing board.
Once the budget is prepared and approved, don't put it away in a dark corner. To be useful and effective everyone should take the budget seriously. The budget should be compared with the actual experience in order to measure whether the organization's goals, set by the budget, are being met.
Goodworks, Inc. Comparative Income Statement With Budget 199x
|
Actual |
Budget |
Variance |
| Income |
|
|
|
| Contributions |
25,000 |
27,500 |
(2,500) |
| Grants(unrestricted) |
5,000 |
5,000 |
0 |
| Sales (Net) |
4,325 |
4,000 |
325 |
| |
|
|
|
| Total income |
34,325 |
36,500 |
(2,175) |
| |
|
|
|
| Expenses |
|
|
|
| Staff |
10,000 |
12,000 |
(2,000) |
| Office expense |
1,120 |
1,000 |
120 |
| Telephone |
5,665 |
6,000 |
(335) |
| Counseling |
12,000 |
12,000 |
0 |
| Bus tickets |
4,960 |
5,000 |
(40) |
| Misc. support |
510 |
500 |
10 |
| |
|
|
|
| Total expenses |
34,255 |
36,500 |
(2,245) |
| Excess |
70 |
0 |
( 70) |
This is a simple comparison at the end of a period. Ideally, with every presentation of financial information there should be a comparison and recognition of what remains to be done to achieve the budget expectations for the year. There are other types of budget reports that are essential to the smooth running of an organization. For the small group, the most important is a cash flow budget. This is the budget of income and expense broken down monthly to ensure cash will be there when needed. If you expect all your expenses in the first three months of the year and all your income in the last three months of the year, you will be out of luck unless the organization has built up a large cash surplus. Plan your cash flows.
A Budget for Capital Expenditures — Bought or Received | Top
Capital expenditures are those that acquire assets whose useful lives are greater than the current period. Many times a small organization will borrow assets, or members will use personal assets for the needs of the organization.Donors of non-cash items will need to help provide a solid estimate of the value of the items, both for the organization's records and for the donor's records for tax and other purposes.
Some donated items, such as stock or a vehicle, require a transfer of title, which is recorded with local or federal authorities. Make sure this transfer of title is carried through in an orderly and timely manner.
Some gifts bring new responsibilities to the organization. Can you safeguard this asset? Does it need to be insured? Do you need a safe deposit box? If an asset is housed on premises that do not belong to the organization, then a master list of such assets and their whereabouts should be prepared and maintained in a safe and central location.
There are other gifts that need accounting and budgeting. One is the forgiveness of rent for space. The fair market value of the rent should be recognized on both the budget and actual financial information as income and expense.
This type of recognition gives a better picture of the true state of affairs for the organization. If you lose the free rent, can you make up the difference in cash donations and afford to pay the rent? This question is best answered when the value of the prior gift is recorded.
Capital budgets can be achieved over a period of years when a sinking fund is established to collect money for a future capital expense.
Restricted Grants | Top
Budgeting for restricted grants must be done in advance. A careful inquiry of the grant giver will allow you to know the expectations of the grant-giving organization. As noted in the discussion of revenue sources, there can be many strings tied to grants. Be aware of them. Discuss the requirements not only with the grantor, but, if possible, with another organization that has received such a grant in the past.
Changes and Conclusions | Top
Can budgets be changed? Sometimes they have to be when expectations are not met. Rather than abandon a sound budget plan when an emergency or opportunity arises, an organization should be able to handle the change in an orderly fashion. By-laws should also be examined for guidance on how an adopted budget can be altered.
If an expected donation that has been budgeted does not materialize, you have several choices. The most obvious is to seek other sources of funds. Next you can cut expenses. Less obvious is a rearrangement of expenses. A gift of an asset, as previously discussed, might relieve a budgeted expense. A program that was scheduled to begin in one quarter might be moved to another period, allowing the expenses of that program to be moved as well. All of the decisions above should be made with reference to the budget, as well as to the current cash and financial picture.
Budgets should be a major part of every organization's plan. This plan should give the flexibility needed to achieve goals with order and success. The documentation of budget assumptions and changes will provide a basis for improving the efficiency of the budgeting process each year.
This guide was last updated in September 2007. Permission to duplicate this guide may be obtained from the Virginia Society of CPAs, P.O. Box 4620, Glen Allen, VA 23058-4620, (804) 270-5344 or communications@vscpa.com.
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