Want to learn more about budgeting for beginners? Watch the accompanying webinar recording.
I vividly remember the first time I was asked to prepare a budget. I wasn’t sure where to start. There was no written process. I couldn’t find any comments or notes or descriptions of how the prior years numbers were arrived at, and the person who prepared the previous year’s budget was not around. I was stressed and anxious and wasn’t sure I could do it.
Fast forward 25 years. I can do complex budgets in my sleep. I’ve learned a lot about how to put budgets together. I’ve had to report actual results compared to budget to boards and be accountable for variances. I’ve had budgets that we’ve met, and budgets that we didn’t meet (spoiler alert: the former are a lot more fun!).
So – you might ask – what advice would I love to have had from my future self 25 years ago? First, take a deep breath. With a little thought and patience, anyone can do a budget. If you can balance your cheque book, you can create a budget.
Second, follow a process. A simple 10-step process would be as follows.
1. Set a timeline
Ideally, your budget should be complete and approved by your board prior to the start of your next fiscal year. So, work backwards from your scheduled board meetings prior to year end and plot a timeline that gives the board at least two board meetings to review, discuss and hopefully approve the budget. You might be able to do it in one meeting, but some board members may have questions that need to be resolved before the board can give their approval, so its always safer to plan for two meetings. If you have clearly documented goals and objectives, starting 3-4 months prior to year end should give you enough time. If not, you may need more.
2. Determine who you will need input from and assemble your team
This could be program managers, your Treasurer, key board members, key managers, or you may be on your own. Generally, the more the better. Budgeting is a planning process, so the more people involved in the process, the higher the buy-in and accountability. You eventually have to get buy-in from your board and your team, so the more they are involved in the budgeting process, the better.
3. Gather required information
There are a few pieces of information that I usually try to start with. First, any planning documents that we have prepared that outline our goals and objectives for the current year (or prior years). In an ideal world, we’ve already set some priorities for current year. I also try to get year-to-date financial results for the current year plus projections to year end, if available. This gives me a solid starting point for to the extent that some things will likely be the same as last year.
4. Use the same account structure for your budget that you use to track actual results
If your budget has different categories for revenues and expenses than you use to track actual results, it becomes difficult and time-consuming to compare actual results to budgeted results and calculate differences. So wherever possible, try to use the same account structure in your budget as you do in your bookkeeping and accounting system.
5. Start with the information that you are most confident about
In some organizations this may be revenue, or it may be expenses like salaries and rent. I’ve seen organizations that have recurring grants start with revenue because they have been working with their funders for the last few months and can pretty much guarantee what their revenue will be for the next year. I’ve seen other organizations that have many full-time employees. They start with salaries (and their other expenses) and this tells them how much they have to raise next year in order to cover their expenses. They key is to be clear which information you are confident about and which information you are not.
6. Fill in the blanks as best you can
For most organizations, salaries and facilities costs will account for up to 80% of their budgets. So in some cases, the bulk of the budget will be pretty straight forward. Many organizations will have pretty good estimates of their revenue and facilities costs, and can calculate their expected payroll. The remaining numbers are usually quite small and can be estimated using common sense.
7. Include some notes with your budget if there is anything readers should know
Many budgets contain revenue that is “soft” or unconfirmed. Its good to let people know this so that they can understand how “hard” the budget is. Same with big expenses. If you are doing something different this year compared to prior years, and you’ve had to estimate some important numbers, make sure you indicate that these are estimates and may vary based on experience.
8. Document your assumptions and calculations
Excel has a wonderful feature that allows you to add notes to cells. We strongly recommend using this feature or other features of Excel to document how you arrived at all of the estimates included in your budget. These become very useful when you are trying to analyse variances from budget and when you are preparing your budget for the following year. Documenting your processes will really speed up any subsequent analysis.
9. Generally, budget to break-even
Most organizations usually try to budget to break even (breaking even is where revenues are equal to expenses in the budget). There are certainly exceptions to this. Organizations may budget small surpluses if they are trying to build up reserves; or if they have sufficient reserves, they may budget deficits in years where they need to invest in capacity building or have significant one-time expenses.
10. Ensure alignment of your budget with your priorities, goals, and objectives for the year
We obviously need to budget for ongoing operations, but if we are going to achieve our goals for the year, it usually means spending some resources (money and volunteer labour) on them. One of the key criteria for evaluating a budget is the degree to which readers can connect the dots between the priorities we have for the year and how much money we are spending to achieve each of those priorities.
So, there is a simple 10-step process you can follow to create a simple budget. If you are interested in more detail, Charity Village hosted a webinar on Nonprofit Budgeting for Beginners on November 26th. Watch the recording to learn more about how you can increase your budgeting skills and build your budgeting confidence. In fact, bring your budgeting team. Everyone in most organizations wants to build their budgeting knowledge and skills.
Gordon Holley is the President and CEO of Humanity Financial Management Inc. As a CPA, CA, Gordon loves helping organizations that are trying to make the world a better place. He has over 40 years of experience on charity and not-for-profit boards, mostly as treasurer. In his role at Humanity Financial, Gordon sees the stress and anxiety produced by finances and financial reporting for many not-for-profit-organizations (NFPOs), charity board members, and senior staff. He excels at providing financial oversight to NFPOs and charities to help them better manage their internal finances and financial budgeting and reporting, and reducing everyone’s financial stress and anxiety.