The Budget-Building Book for Nonprofits

A Step-by-Step Guide for Managers and Boards

Murray Dropkin, Jim Halpin, Bill La Touche

• Publisher: Jossey-Bass
• Year: 2011
• ISBN:
  9781118047545
• Edition: 2
• Topic: Commerce
• Subtopic: Organismes sans but lucratif et organismes de bienfaisance

This best-selling nuts-and-bolts workbook, now in its second edition, has become the gold standard for nonprofit managers and boards who must work through the budget cycle. The book offers practical tools and guidance for completing each step of the budgeting process. Designed to be comprehensive and easy to use, The Budget-Building Book for Nonprofits provides everything budgeters and nonfinancial managers need to prepare, approve, and implement their own budgets.

Includes new chapters on Zero-Based and Capital Budgeting as well as an accompanying website with spreadsheets, worksheets and a new budget-building software, the CMS Nonprofit Budget Builder, designed to help you implementthe concepts in the book. The software includes an expandable standard chart of accounts (COA) and will aid in building, organizing, tracking and planning budgets.

Part One

Understanding Budgeting Basics

Chapter 1

Why Budgets and Budgeting Are Important to Nonprofits

MERRIAM-WEBSTER′S Collegiate Dictionary defines budget as

1. “A statement of the financial position of an administration for a definite period of time based on estimates of expenses during the period and proposals for financing them”

2. “A plan for the coordination of resources and expenses”

3. “The amount of money that is available for, required for, or assigned to a particular purpose”

These are pretty long-winded definitions. In plain language, they mean:

• An effective budget is a plan

• For receiving and spending specific amounts of money

• In specific cost categories

• To get specific things done

• Within a set period of time

• With monitoring mechanisms built into the process.

There is an even shorter way of saying this:

A budget is a plan for getting and spending money to reach specific goals by a certain time.

A budget is a plan. The word plan in this sentence sounds solid and reassuring. In reality, however, most plans are only as good as the work and information that go into preparing them. Basically, a plan is

• A well thought-out idea of future actions

• Needed to achieve specific goals

• Within a set period of time,

• Based on past experience,

• Accurate current information,

• And assumptions about the future (based on the best research possible).

This means that people who prepare budgets and plans must

• Set specific goals,

• Examine the past, present, and future,

• And identify the specific actions and costs

• Needed to reach the goals they set in the first place.

Four basic rules about budgets and plans are

Rule 1.	A budget is a plan for spending money to reach specific goals within a certain time period.
Rule 2.	Any budget or plan is only as good as the time, effort, and information people put into it. Good budget practices should foster collaboration and exchange of information among the budget team participants.
Rule 3.	No budget or plan is perfect because none of us can totally predict the future.
Rule 4.	In order to reach the goals, all budgets and plans must be monitored and changed as time goes on.

A. The Importance of Budgets and Budgeting

Many nonprofits need budgets to get money in the first place. Government funders and foundations will generally not accept a grant application without a properly prepared budget. But even if a funding source or a donor is willing to provide funds when no budget exists, a well-managed nonprofit will still prepare a detailed budget for spending the money. Simply stated, the top economic priority of any nonprofit should be staying solvent, and budgeting is the optimum tool for promoting this goal. Finally, the more clear, accurate, and well thought out budgets are in the beginning, the more likely a nonprofit is to be able to

• Adjust plans, activities, and spending as needed.

• Spend money cost effectively.

• Reach the specific goals it has set.

• Receive “clean” audits.

• Avoid incurring questioned or disallowed costs or cost overruns that it may have to pay for from other funds.

Well-prepared budgets have many other important benefits too. They let everyone in the organization know

• The goals to be achieved

• The work to be done to reach the goals

• The resources (people and things) needed to get the work done

• The resources available for getting the work done

• The timetable and deadlines for getting specific work done

• The individuals responsible and accountable for doing the required work

Budgets serve these additional functions for well-managed nonprofits:

• Budgets provide the financial and operational guidance management and staff need to implement board policies and directives.

• Budgets allow management to measure and guide current and long-term financial health and operational effectiveness.

• Budgets guide the acquisition and use of resources.

• Budgets anticipate operational expenses and identify income to pay for such expenses.

• Budgets are tools for controlling spending and avoiding deficits.

• Budgets help integrate administrative, staff, and operating activities.

• Budgets allow management to monitor actual income and expenses, comparing them to the amounts budgeted, assessing the nonprofit’s overall financial ing them to the amounts budgeted, assessing the nonprofit’s overall financial situation, and altering plans as needed.

• Budgets can serve as the basis for performance reviews and, in some cases, compensation criteria.

B. The Basic Characteristics of Budgeting

Effective budgeting is thoughtful and deliberate. It involves carefully setting goals and developing plans and also creating a logical and informed process for allocating resources.

Budgeting is inclusive. It brings together the perspectives and interests of a wide variety of stakeholders: the board, clients, management, staff, volunteers, prospective donors and income sources, and the general public. At the outset of the budget process, input from all relevant parties is sought. Dissemination of the approved budget should clearly and effectively communicate priorities, goals, and operational plans to the entire organization as well as to other stakeholders.

Finally, budgeting is an ongoing process. It does not occur in a vacuum or for a limited period, producing a document that gathers dust on a shelf. Ongoing monitoring, data gathering, analysis, revision of projections and assumptions, and consideration of alternatives are needed.

Over time, careful attention to the budgeting process will lead to greater financial stability, operational effectiveness and efficiency, and responsiveness to organizational needs and priorities.

Chapter 2

Understanding Basic Types of Nonprofit Budgets

Overview

GENERALLY, NONPROFITS BENEFIT from using six types of budgets:

1. Total, organization-wide operating budgets

2. Operating budgets for individual programs, units, or activities

3. Capital budgets

4. Cash flow budgets (also called cash flow projections)

5. Opportunity budgets

6. Zero-based budgets

A. Organization-Wide Operating Budgets

Nonprofits with multiple programs or units are most likely to need an organization-wide operating budget. Such budgets identify all the income and expenses anticipated to be needed for the entire organization’s operations during the coming year. An organization-wide operating budget should include all the costs for employees, consultants, programs, services, facilities, and other elements needed to organize, carry out, and evaluate the organization’s total administration, units, programs, and activities.

To establish and maintain an organization-wide operating budget, nonprofit managers need to spell out the budgeting cycle, budgeting responsibilities, and a detailed schedule or budget calendar. In addition, the board should adopt written budgeting policies to guide the overall process. Usually these policies also describe the economic framework for the budget (for example, they may set a standard for the estimated rate of inflation to be used in computing budget amounts).

The size and complexity of a nonprofit determine to what extent its organization-wide budget will resemble a pyramid, with each succeeding level representing a consolidation of several budgeting units, or cost centers. For example, the lowest level of the pyramid in a large nonprofit’s budget may comprise individual program and activity budgets. The second level will include consolidations of the program and activities for each unit into unit budgets, each of which will also include the budget details for the functioning of the unit itself. The third level may consolidate all the unit budgets into department or division budgets, each of which will also include the budget details for the functioning of the department itself. Finally, the organization-wide budget tops the pyramid; it contains all the department or division budgets and the highest-level organizational budget details.

A small nonprofit without multiple units or departments may present the budget of its one program or activity as its organization-wide budget (assuming it has only one program or activity). However, if it consolidates several unit or program or activity budgets into an organization-wide budget, each program or activity budget must include a justifiable allocation of the organization’s overhead and central administrative costs. The reason for this is that the individual programs serve as cost centers (that is, primary fiscal units) in small nonprofits, and each program budget would be understated if it did not account for that program’s share of the general overhead.

For a sample organization-wide expense budget, see Exhibit E.1 in Resource E. For more detailed information on creating organization-wide operating budgets, see Chapters Six and Twelve.

B. Operating Budgets for Individual Programs, Units, or Activities

Each of a nonprofit’s individual programs or activities usually requires its own specific budget, both to gain support from outside donors and other funding sources and to provide necessary budgetary controls. Such individual operating budgets will also help to build the total, organization-wide operating budget.

An operating budget for an individual program, unit, or activity should allow for all the employees, consultants, services, facilities, and other elements needed to organize, carry out, and evaluate operations of a specific program, unit, or activity. Small nonprofits that operate a single program or have a single purpose—as day-care centers often do, for example—may find they need to create only one program or unit budget, which encompasses the entire organization’s operations.

For examples in worksheet form of program or unit operating budgets, see Resource B. See Chapter Thirteen for a more detailed discussion.

C. Capital Budgets

Capital budgets are tools that nonprofits may use to help themselves plan and manage capital projects, those requiring relatively large, one-time expenditures. In many cases, capital projects require funding for more than one fiscal year, a time frame that will have to be reflected in capital budgeting. Basically, there are two sorts of capital projects: capital improvement projects (used to buy, construct, or...