A Five-Step Guide to Budget Development

Transcription

1 A Five-Step Guide to Budget Development Instituting Team Decision-Making in the Budget Process All material herein 2012 Fiscal Management Associates, LLC. All rights reserved.

2 Supports organizational planning and decision making on how to allocate resources Establishes a benchmark against which to monitor financial activity and results Provides a tool to: Put strategy into operation Control spending Communicate plans and expectations Minimize the possibility of fraud Support long-term financial health and sustainability 2

3 1. Assemble a Budget Team 2. Create a Budget Calendar 3. Prepare for and Conduct Budget Kickoff a) Set financial goals b) Gather data and build budget template c) Conduct team kickoff meeting 4. Draft the Budget a) Forecast current year results b) Budget expenses and revenues c) Assemble the organization-wide budget d) Secure board approval e) Forecast cash flow 5. Monitor the Budget a) Create mid-year revision if necessary 3

4 1. ASSEMBLE A BUDGET TEAM The Budget Development Process 4

5 Team Decision Making (TDM) fosters collaboration across the organization, encouraging staff to work together to: Define goals Allocate resources Monitor progress TDM provides program and other non-finance staff with the skills and tools to contribute to the budget development process and monitor the budget for their area of responsibility. 5

6 Team composition and titles will vary based on organization size and structure, but this is a typical configuration. Chief Executive Officer (CEO) Program and Department Managers Chief Financial Officer (CFO) with Finance Staff Human Resources Director Development Director Board Treasurer, Finance Committee 6

7 The Chief Financial Officer leads the budget development process: Creates a budget calendar Designates a budget team (with CEO) Creates a budget template Assembles necessary materials (historical financials, etc ) Leads a budget kickoff meeting Presents the budget to the board s finance committee (with CEO) Depending on organization size, the CEO or board treasurer may also lead aspects of the budget development process 7

8 2. CREATE A BUDGET CALENDAR The Budget Development Process 8

9 The CFO drafts the calendar which includes meeting dates and deadlines. The calendar typically starts six months before the upcoming fiscal year. Separate calendars should be established for budget monitoring and internal reporting and other aspects of fiscal management. 9

10 Budget Development Calendar Fiscal Year End: June 30 January February March April May June Prepare mid year budget revision for current fiscal year based on actual results for Q1 and Q2 Obtain Finance/Audit committee approval of mid year budget revision for current fiscal year Begin next fiscal year budget process; identify Budget Director and Budget Timetable; gather information necessary to develop expense and revenue budget for the next fiscal year Assemble draft budget for next fiscal year, incorporating fiscal and program personnel Circulate draft budget and budget narrative to Finance/Audit Committee; incorporate comments and recommendation Send budget package to Board of Directors; Board meets to approve budget for next fiscal year Incorporate next fiscal year's board approved budget into organization's accounting system Update cash flow templates for coming 12 month period 10

11 3. PREPARE FOR AND CONDUCT BUDGET KICKOFF The Budget Development Process 11

12 In conjunction with the board of directors, the CEO and CFO set overall financial goals, considering: Anticipated increases or decreases in program activities Operating results strategy Break-even? Surplus? Planned deficit? Strategic plan and long-term goals 12

13 Gather Data CFO and finance staff assemble historical results by program and department: Current fiscal year budget Remaining budget for the current fiscal year Current year-to-date actuals Prior year budget and actuals Build a Budget Template CFO and finance staff build a blank template for each program and department: Contains all line items under the relevant manager s control ( controllable costs ) Includes columns for the remaining months of the current fiscal year and 12 months of upcoming fiscal year 13

14 The CFO rolls out the budget development process in a kickoff meeting. All staff involved in the budget development process attend. The Agenda Introduction to the budget Communication of financial goals Distribution of blank budget template, historical data, and general ledger account definitions Instructions on next steps Staff questions 14

15 4. DRAFT THE BUDGET The Budget Development Process 15

16 Managers of programs/departments use the budget template to forecast remaining expenses by month for the current fiscal year. Helps the finance staff update the organization-wide forecast Where will the organization be at the end of the current year? (i.e., break-even, surplus, or deficit) How does this relate to and impact financial goals for the upcoming year? Indicates how reflective of reality the current year s budget was Prepares staff to project expenses and activities for the upcoming fiscal year 16

17 Initial expense budgets should reflect best estimates of what it truly costs to run programs/operations. Adjustments will be made later in the process if the level of budgeted expenses cannot be supported. Managers of programs/departments use the budget template to project personnel and direct other-than-personnel (OTPS) expenses. Indirect expenses such as occupancy will be allocated across programs and functions by the finance staff later in the process. 17

18 The development director projects revenue anticipated from individual donors, foundations, corporations, special events, and other nongovernment sources. Finance staff, with support from other staff as needed, project revenues from government entities based on existing and anticipated contracts. Program staff, with support from finance staff as needed, project fee-forservice revenue streams based on past performance and future plans. 18

19 If there is high uncertainty around revenue projections, draft a scenario budget reflecting the likelihood of receiving each source. Next, draft expense scenarios ranking potential reductions. Board approved benchmarks to trigger action can be implemented. Example: If $A funding from B funder doesn t come through by C date, $X of specified expense reductions will be made. 19

20 Finance staff pulls together the organization-wide budget based on the completed budget expense templates and revenue projections Indirect costs are allocated to programs using a consistent methodology, such as one of the following: Headcount (FTEs) Percent of salary dollars Square footage or other facilities utilization measures Revenues are matched to expenses by program. The CFO presents the draft budget to senior management. If adjustments are needed to align budget with financial goals, templates are redistributed to program/department managers with instructions on level of necessary adjustments. 20

21 CFO submits draft budget to the finance committee six to eight weeks before the new fiscal year Senior management and finance staff make revisions Once approved by Finance Committee, submit to full board Full board approves before the new fiscal year begins Once the budget is approved, the CFO conducts an information session to orient managers to the overall organizational picture and to their budget for the year. 21

22 Once the budget is approved and finalized, the CFO and finance staff should develop a cash flow forecast showing the expected timing of cash receipts and disbursements over the course of the fiscal year. This forecast should be updated and monitored over the course of the year to identify in advance any potential cash shortfalls that may need to be addressed. 22

23 5. MONITOR THE BUDGET The Budget Development Process 23

24 Reporting Finance staff enters the approved budget into the accounting software. Managers begin to approve expenditures against budgets for their area of responsibility. Finance staff produces monthly reports for: Program, development and department managers Senior management Board Monitoring The CFO and senior management analyze variances between budgeted and actual revenues and expenses. Discuss root causes with appropriate manager Create action plan to address significant variances 24

25 Internal reporting should provide timely, reliable and relevant information. Supports program-level decision making Facilitates senior management in making strategic financial decisions to support long-term sustainability The following reports are recommended on at least a quarterly basis: Program, department and development directors Budget-to-actuals for area of responsibility, including variances Senior management Budget-to-actuals by program, including variances Reports distributed to the Board Board of directors Management budget narrative highlighting significant activity Consolidated budget-to-actuals, including variances 25

26 In many cases, it is advisable to develop a formal budget revision around the mid-point of the year. You should consider a budget revision if: Actual revenues or expenses exceed pre-established thresholds for budget revision Unanticipated events occur which alter financial expectations in a significant way Programmatic or financial goals change in ways that affect financial plans Note that the revised budget becomes the new standard by which the organization sets its revenue and spending plans. As with original budgets, budget revisions should be formally approved by the board. 26

27 The following resources available on The Wallace Foundation s Resources for Financial Management website can assist you with particular elements of the budget process described in this presentation: Fiscal Management Activities Calendar Click here Program-Based Budgeting Template Click here Revenue Analysis Worksheet Click here Cash Projection Template Click here 27

28 FMA is a management consulting firm established in 1999 to serve not-for-profit organizations around the country. We provide customized financial management, accounting, software, organizational development, human resources, and other consulting services. We work directly with organizations or through funder-supported management and technical assistance programs. FMA works to build a nonprofit sector where every organization practices the sound and effective management necessary to carry out its mission. For additional information please contact: Hilda Polanco, CPA Managing Director hpolanco@fmaonline.net Park Ave South, 3 rd Floor New York, NY John Summers Manager jsummers@fmaonline.net Park Ave South, 3 rd Floor New York, NY 10016