Building an Effective Budgeting Process

By Cheryl Olson, CPA, CGMA

The budgeting process can often seem like an exercise that takes a lot of staff time without much impact. If you find that to be true for you, it’s time to change your process.

The budget has the potential to establish benchmarks, assess financial health, and increase accountability and oversight. I like to say the budget is the financial interpretation of your strategic plan, so that’s the first place to start in the budgeting process. What is your plan? What are you trying to accomplish?

A comprehensive budgeting process contains the following components:

Put the Plan in Writing

The entire process is in writing and shared with all staff. This resource can act as a checklist to keep the organization focused. Sharing the process with the entire staff makes them aware of the importance of the project and aids in getting early buy-in. Ideally, the budget process is shared by the CEO or a member of the leadership team and reinforced by department heads to make it more of an organizational priority and to stress it’s not just the finance department’s project. However, it’s very important not to make the budgeting process overly complicated.

Establish a Team

The official budget team includes the core members, such as the CEO, finance staff, and department heads. Identify the executive who will champion the work, which will differ based on your structure, and the team lead, usually the CFO. Don’t forget to include those members that will need to be consulted, such as your program experts. Building your budget team is also an opportunity to teach budgeting skills for specific staff that have been identified through the organization’s succession planning process. It’s important to be intentional and inclusive in building your budgeting team.

Create a Calendar

Create the budget calendar with a timeline, taking into account key organization dates for closures, events, and board and committee meetings. Of course, you want to look at external dates such as funder deadlines, holidays, etc. This is a great tool that helps keep the team on track and should include full team meetings and periodic check-ins.

Establish Guidelines

Ensure alignment with the organizational goals and priorities. This is the time to provide clear information on whether the organization will pass a deficit, surplus, or balanced budget; whether the time period will be a one-year or multi-year budget; if there are any new programs or organizational investments that need to be made, and if the organization is seeking a diversification of revenue. If the nonprofit is contemplating organizational investments, new programs, or new revenue streams, this is the time to research in order to determine the impact to staffing, unrelated business income tax, and cash flow.

These guidelines are also impacted by prior-year results, economic predictions, industry trends, and the benchmarks you are trying to hit. Don’t forget to have conversations about your operating reserves and donor restricted funds. What are they currently? Will the budget impact the levels? For example, if you have an operating reserve benchmark of six months of available cash and the organization only has five months available, a surplus budget would need to be passed to increase reserves.

Budget Draft

Begin drafting the operating budget. Each organization may approach this differently. Some start with expected income, some start with staffing and related costs since that can account for 50-75% of the budgeted expenses, some start with all expenses, and some start with key programs budgeting both revenue and expenses. There is no right way to get started. Be conservative and only include realistic amounts. For additional information on approaches, look at incremental budgeting, zero-based budgeting, income-based Budgeting, and what-if scenarios. Prepare the budget with the financial statements in mind to ensure alignment on your budget to actual reporting.

Review and Approval

The final staff prepared budget is then reviewed by the finance committee and presented to the board of directors or trustees for approval. It’s often helpful to include the plan the budget is supporting to help make the connection between the two. If changes to the budget are being considered, it’s important to look at the impact of those changes on the plan itself. There needs to be sufficient time between the finance committee meeting and the board meeting for changes and to send out the revised version to the board in advance of the meeting.

Many nonprofit organizations stop here in their budgeting process. To have an effective budgeting process, the organization can take it further with these additional components:

Final Versions

Once the budget is approved, it’s important to finalize the budget internally. This means turning your draft versions into a final document in your naming conventions, importing the budget into the accounting system (if not entered during the process), electronically storing it, and communicating with all staff. Depending on the organization’s depth and type of volunteer base, a communiqué to key volunteers may also make sense. Department leads can then discuss the budget impacts on their plans with the team. Sometimes in the flurry of putting together a final budget draft, not all staff are kept in the loop on budget revisions, so this is a good time to close that loop on any changes.

Monitoring Results

Monitoring the budget results on a regular basis is an operational role at the staff level. Depending on the size and structure of the nonprofit, this role can be filled by budget managers, finance, executives or a combination thereof and communicated through the monthly budget to actual reports. Monitoring the results on a higher level is taken on by leadership, finance committee, and the board of directors or trustees through review of financial statements comparing the actual results to budget and to the prior year. The statements need to be prepared timely and accurately, preferably within 10-15 business days. Each organization needs to have a plan in place regarding how they will handle and communicate budget variances.

Forecasting

While not all nonprofit organizations forecast what they expect their final results to be, it can be a helpful exercise as new and additional information becomes available.   This part of the process requires management not to just be looking at past results and at the present, but to be planning the future based on projections. Forecasting information can be presented in a column on the statement of activities or in a written commentary supporting the financial statements.

Oversight

Keep in mind, the Board of Directors or Trustees have the ultimate responsibility for allocation of resources and oversight. Many organizations delegate a more detailed review to management and the finance committee. Depending on the organization’s size, complexity, and lifecycle, the type of financial information, frequency of information, and handling of variances will differ between audiences. Some will look at financial results in detail, some will look at a high level, and others may only look at a dashboard, which is a summary of key financial and non-financial indicators. If the finance committee is meeting only quarterly, consider sharing monthly financial information to keep the members informed, especially if there are cash concerns.

Following are some general budgeting tips. Ultimately, for the budgeting process to be effective, the organization’s culture needs to support it as an integrated planning and monitoring tool. The level of importance invested with the budget is reflected in the timeline, number of staff involved in the process, and the communications used in the process.

• Complete and approve the budget prior to the beginning of the fiscal year
• Don’t “plug” the fund development revenue number
• Look at the impact to the overall plan before cutting expenses
• Include a cushion or contingency
• Obtain input from staff and key volunteers
• Plan for capital expenditures

When working with nonprofit clients and discussing their accounting software, we often hear the need for stronger budgeting technology. Since technology only enhances an existing process, it is critical to establish an effective internal process before making a decision about what technology to use. Many nonprofit organizations use Excel to prepare their budget, some use elaborate workbooks with formulas utilized by multiple staff. If this system works for your organization, fantastic! Some organizations use their accounting system to prepare the budget, which can include the ability to prepare different scenarios, assumptions and projections. Again, if this is working for you, fantastic!  If the two options above are not working for you, then you might want to look at a third-party budgeting software system.  There are a number of choices, including Adaptive Insights, Centage, PlanGuru, and Martus Solutions that could integrate with your accounting system. Again, focus on the process first and then determine the technology to best handle and possibly improve your efficiency in preparing the budget.

© Clark Nuber PS, 2016. All Rights Reserved