The favorite time of year for most nonprofit board members, executive directors and accounting personnel is when the budget process is in full swing, right? While budgeting can be painstakingly boring, tedious and time consuming, the annual budget is the document that will help your nonprofit achieve financial stability to continue operating the programs that our communities need.
It is important to remember that the budget is a guideline of best laid plans, and plans are more often achieved when they are realistic and intentional. In an article on the National Council of Nonprofits website, the author discusses the myth that the budgets of a nonprofit organization need to balance. The process should not be focused on creating a budget that is balanced, but rather focused on creating a budget that defines the goals of the organization and reflects those goals accurately. For example, if the goal is to begin building surplus cash reserves, the budget should reflect this and would have a net profit at the end of the year, allowing cash reserves to increase. Alternatively, if the organization already has adequate cash reserves but wants to start a new program to further the organization’s mission, hire additional staff, increase their online presence by creating a new website, or invest in new equipment or computers, then the budget should reflect these goals and potentially show a deficit for the year. The fact that the organization’s budget and financial statements show a net loss for the year can be a positive outcome, as long as it was intentional and reflects the goals of the organization.
In addition to creating a budget that is intentional and realistic, it is also important to monitor the budget during the year after it is approved. The budget is only a useful tool if it is referred to throughout the year. Comparing actual revenue or expenses to budget figures can help management and the board determine if they are ahead or behind schedule. Monitoring will allow management to determine the need for a potential budget amendment, or identify any unexpected expenses or revenues. This process will also assist management determine from an operational standpoint which programs are working well and where overspending may be occurring.
Next time your organization is sitting down to start the budgeting process, take a step back and look at the big picture. Keep an open mind and focus on defining what the goals of the organization are for the year, and how these goals should impact your budget. And lastly, and most importantly, make it a point to review and adjust the budget during the year as needed. If you need advice or have any questions please feel free to contact the Non-Profit Team at Ketel Thorstenson.