By Lee T. Sullivan, CPA, CGMA, Manager and Bo Garner, CPA, MBA, Supervisor
As Published in Inside Business
Particularly hard hit by the current state of the economy have been nonprofit organizations, many of which were forced to merge with other nonprofits or simply close their doors.
Much of the pain felt by nonprofits derives from the fact that so many rely on donor contributions or public funds to meet their budgetary needs. Individuals and organizations have had less ability to make donations to the worthiest of causes than in past years. Federal, state and many local governments have had to cut funding due to budgetary constraints as well.
Clearly, nonprofits can’t control what happens on Wall Street. They can, however, help themselves to weather such economic downturns by constantly emphasizing the need to budget and plan for the unexpected. What happens if major donors suddenly go away, if key personnel responsible for “rain making” leave for another job, or if the economy takes an unprecedented, across-the-board downturn?
The answer is that nonprofits must plan for such worst case scenarios, but do so in a way that is realistic. That planning begins with creating a sound and sustainable budget that is in line with the nonprofit’s mission, objectives, and goals. Budget planning not only will guide the organization’s direction and help it to make sound financial decisions, but will also ensure that the organization does not overspend its funds.
To be truly effective, nonprofit budgets should be:
- Attainable: To serve as a guide for fundraising efforts and program activities, a budget must be well-reasoned and reflect current conditions. Nonprofits should use the prior year’s actual results as a starting point and avoid unsubstantiated revenue projections and unsupported cost estimates.
- Consistent: An effective budget must be consistent with short and long-term strategic plans, and be aligned to the organization’s mission and goals.
- Flexible: Budgets are based on a combination of facts and assumptions. If actual events and conditions vary from these assumptions, there must be opportunities to amend the budget to account for unanticipated expenses.
- Measurable: The basis on which the budget is created should be the same as the operational activity accounted for internally.
- Accountable: Nonprofits should hold individuals in charge of budgeting their department or program accountable for the actual results of performance against the budget. It is important, though, not to make consequences too harsh or too rewarding. Going too far in either direction may tempt employees to manipulate the numbers or redirect efforts to focus on the numbers alone.
- Unique: Each organization’s budgeting process is unique, so find the budgeting process that works best for you. Remember: budgeting is an art, not a science.
To create an effective budget, begin by planning. Determine the goals for each program undertaken by the organization. Use the prior year as a starting point, then take a hard look at possible inefficiencies or additions, keeping in mind that personnel costs typically account for the largest expense within the budget. Adjust for known increases in rent, insurance, fuel prices, etc. Then use current data to get an idea for target budget amounts.
With that information in hand, a draft budget can be compiled. Once a solid draft of the budget has been completed, it should be reviewed in a collaborative manner with senior management and the Board. Document any assumptions you have made and have them reviewed by the appropriate oversight committee before finalizing the budget.
Operating in the nonprofit industry can be extremely challenging, but creating a sound financial budget will create a firm foundation for your organization. The more documentation around the assumptions, the easier it is to account for and adjust to volatility that results from factors that impact the organization. Taking such formal and deliberate steps will help nonprofits to avoid the pitfalls, delays, and pushback that are all too often a part of the budgeting process – particularly in our current economic climate.
Lee T. Sullivan, CPA, CGMA, is a manager at PBMares, LLP and leads the firm’s nonprofit team. Bo Garner, CPA, MBA, is a supervisor at the firm. PBMares is a regional accounting and consulting firm serving clients throughout the Mid-Atlantic. For more information, please contact the authors at email@example.com or firstname.lastname@example.org.