How to build your Nonprofit’s Budget – Collaborate!
Collaboration is the most important ingredient in developing your nonprofit’s budget. That’s the advice we got from finance pro, Paul Konigstein, our guest blogger of the week. For more great advice from Paul, read on below. Budgeting for any nonprofit is no easy task. Hopefully this post will help you as you work through your nonprofit’s financial needs.
Everyone knows the cliché that no two snowflakes are alike, but nonprofit leaders often fail to realize that no two nonprofits alike. I am amazed at how often clients expect an absolute answer to a question such as “What is the best accounting software?” The answer is, of course, “It depends.” The best accounting software depends on many factors unique to each organization. Not surprisingly, the answer to “What is the best way to build a budget?” is also, “it depends”.
How to build your Nonprofit’s Budget
In the case of budgeting, the approach depends on whether a nonprofit can control the number of constituents it serves. For example, an organization that provides professional development to teachers can close a class when the room becomes full and wait list teachers in excess of capacity. On the other hand, a homeless shelter cannot turn away the needy when the building becomes full. It has to find a way to meet the demand, perhaps by installing additional beds or renting another site. The professional development organization can accurately predict how many clients it will serve. For the homeless shelter, the number of clients is too variable to form the basis of a budget.
The professional development organization budgets expenses by determining the cost of serving each teacher, multiplying the unit cost by the number of teachers, and adding in overhead such as rent. The homeless shelter budgets expenses by analyzing historical trends and relying on expert predictions of future trends.
The process used by the professional development nonprofit is often called zero based budgeting because the organization plans as if it were brand new, or in year zero, with no history to incorporate into the budget process. The budget is based entirely on future plans rather than historical experience. The process used by the homeless shelter does not have a widely agreed upon name. For lack of a better term, I call it traditional budgeting.
Regardless of the process used, collaboration is the most important ingredient in the budget. The expense budget is developed in collaboration with the program managers who will be expending the funds, and the revenue budget is developed in collaboration with the fundraisers who will be generating the funds. This collaboration is crucial to motivating the organization’s staff to stay within the budget. Ownership of the numbers and having a stake in the result are powerful motivators.
The biggest budget mistake a nonprofit can make is to file the completed budget away and not think about it again until next budget season. To have value, the budget must be your bible, or ongoing activity guide. Update monthly how much of each budget category remains to be spent. Check for sufficient remaining budget before making purchases.
Examine the budget each month for variances between the budget and actual revenue and expenditures. Investigate each significant variance until everyone understands why it occurred and whether it requires a change in activities. A good rule of thumb for significance is 10% of the budgeted amount.
Common explanations for budget variances include:
- Program plans change in mid-year – A foundation may offer an unexpected opportunity to expand programming. When this happens, the budget should be revised to include the new programs.
- Environmental factors affect program delivery – Many nonprofits in the New York area experienced actual expenses less than budget in 2012 because programs were cancelled by Hurricane Sandy. In such a case, the budget should be amended to reflect the new environmental reality.
- A miscalculation is made in the budget – The error should be corrected in a revised budget,
A significant variance that cannot be explained should be referred to the nonprofit’s auditor for examination.
Of course, budgeting is much more nuanced than there is space here to explain. This blog provides a basic overview of budgeting best practices which can be adapted to your unique nonprofit.
Paul Konigstein is a Senior Consultant at CliftonLarsonAllen, helping nonprofits improve their finance, accounting, and governance. Paul is equally comfortable as an interim Chief Financial Officer or as an adviser for a specific project. Before joining AMS, Paul spent over twenty years as a nonprofit financial executive with arts and culture, education, and international development organizations including Helen Keller International, the New York Hall of Science, and the Metropolitan Opera.