Budgeting Basics for Presenters Developed by Nonprofits Assistance Fund

Transcription

1 Nonprofit Financial Management Training Budgeting Basics for Presenters Developed by Nonprofits Assistance Fund Budgets are the foundation of nonprofit finance and are vital to your organization s strategic planning and management. Budgeting can seem overwhelming, but it doesn t have to be. Budgets are another tool for you to tell the story about your organization s plans, priorities and aspirations. This workshop is designed to build your confidence in working with budgets. At this workshop, you will learn about the relationships between budgeting, planning, and financial management. You will walk away with a proven 10 step process you can use to craft budgets within your organization. This workshop is right for you if you are new to the nonprofit sector, nonprofit finance, or your position as staff or board member. After this workshop, you will be able to: develop and monitor effective budgets develop accurate cash flow projections read, interpret, and discuss organizational and program budgets The session will also include examples of individual event budget templates and models that are utilized by presenters in the field. Session Leader(s): Phil Hatlie, loan officer/financial specialist, Nonprofits Assistance Fund Christine Tschida, director of Northrop, University of Minnesota

2 Who we are Nonprofits Assistance Fund invests capital and expertise in nonprofits. We have always lived in, and served, the nonprofit world so we understand the nuances of managing a nonprofit. Your mission and success are our top priorities. How we can help Loans for nonprofits: For us, it is more than a loan. Nonprofits are unique. Mission, program mix, funding streams, and business models all impact what kind of loan will work best. From the beginning, we sit on your side of the desk, and we will be your financial partner for the long haul. Training: As a nonprofit staff or board member, you want your nonprofit to thrive. Finances get a whole lot easier and more surefooted when you have the right leadership skills, knowledge, and tools to make that happen. Our trainers are engaging and insightful experts who want to help you be the best in your role. Financial advice: When nonprofits need a trusted advisor, we are here to help. Nonprofits Assistance Fund provides guidance to help nonprofits answer immediate questions, increase financial understanding, and develop effective financial practices and strategies. Financial management and strategy resources: We are always looking ahead and anticipating external impacts on nonprofits. Having access to a comprehensive set of tools to help manage an organization s finances is essential to success. Explore our extensive online resource library for financial management articles, templates, and online learning to help you thrive. Our Trainers Kate Barr, Executive Director kbarr@nonprofitsassistancefund.org Lu Hang, Loan Officer/Financial Specialist lhang@nonprofitsassistancefund.org Phil Hatlie, Loan Officer/Financial Specialist phatlie@nonprofitsassistancefund.org Stephanie Jacobs, Program Director sjacobs@nonprofitsassistancefund.org Curt Klotz, CPA, Finance Director cklotz@nonprofitsassistancefund.org Janet Ogden-Brackett, Associate Director jogden-brackett@nonprofitsassistancefund.org Allison Wagstrom, Loan Officer/Financial Specialist awagstrom@nonprofitsassistancefund.org Nonprofits Assistance Fund st Avenue South, Suite 210 Minneapolis, MN on Twitter

3 Fundamentals of Budgeting Goals: 1. Understand the purpose of budgeting 2. Discuss the role of budgets in planning 3. Review the steps in annual budgeting 4. Understand how budgets are used in financial management What is a Budget? 1

4 A Budget is... A plan An idea of future likelihood A wish list Numbers that reflect program and management priorities A set of assumptions about the year The allocation of resources among alternative choices A best guess working draft for the future Why Do We Need a Budget? Need to allocate limited resources among unlimited needs Need financial language for planning Need a way to agree on priorities Need clear guidance for staff and volunteers Need targets for fundraising and revenue Need a common standard for financial accountability What would happen without a budget? 2

5 Organizational Planning Mission Organizational principles Strategic plan Tactical or business plan Budget and work plan 3

6 The Practice of Budgeting How does your organization develop your annual budget? 1. Who is involved? 2. Who takes the lead? 3. What information is used? 4. What is the timeline? 5. How are decisions and choices made? 4

7 Roles in Budgeting Board of directors Determine and support the mission and strategic plan Set/agree to goals for the organization s activities Set/agree to goals for organizational needs and development Participate in decisions about priorities and balancing Understand the assumptions for the proposed budget Approve a realistic budget Approve budget before year begins Monitor actual results to budget May use Finance Committee Executive director Set the tone and commitment to the process Maintain connection to mission and strategic plan Coordinate budget process Make sure roles are clear Communicate throughout the organization Facilitate choices among alternatives 5

8 Financial staff or treasurer Oversee calendar and schedule Provide information and forecasts Monitor progress and provide assistance and support Assemble and analyze drafts Finalize and convey for approval Other staff or volunteers Understand roles and responsibilities Understand overall budget process and priorities Meet deadlines and follow guidelines Analyze costs and propose budget amounts Propose additions or changes based on program goals Communicate program needs and rationale Development staff or committee Understand process and roles Provide information about funders, prospects, and funding schedules Verify or track information about current grants and requirements 6

9 Types of Budgets Organizational Budget Program A Budget Program B Budget General Admin Budget Fundraising Budget Contract C Feebased Project D Grant E Potential Grant F Grant G Feebased Project H Overall organizational budget: The most common budget, includes all items and all activities. Program, project, or event budget: Complete budget for one specific activity area (part of organizational budget). Grant or contract budget: Specific for a grant request, according to grantmaker s guidelines. May be the same as an overall, program, or project budget. Cash flow budget (projection): A plan for receipts and disbursements of cash for a time period. Long-term budget: Financial plan for more than one year, usually with less detail than an annual budget. Capital budget: Separate plan for expenditures on fixed assets (equipment, buildings, major repairs or renovations). May cover more than one year. 7

10 10 Steps of Budgeting 1. Determine timeline Set target date for board approval Allow time for each step and for review and discussion Approve before fiscal year begins 2. Agree on goals Prioritize programming goals Set organizational financial goals Clarify annual goals from strategic plan 3. Understand current financial status Review current year income and expense compared to budget Forecast to the end of the year Analyze and understand any variances 4. Agree on budget approach Assign roles and responsibilities Agree on authority to make decisions Agree on how much uncertainty can be included (how many unknowns) 5. Develop draft expense budget Determine costs (expenses) to reach programming goals Determine costs to reach organizational and strategic goals 6. Develop draft income budget Project income based on current fundraising and revenue activities Project new income based on new activities 7. Review draft budget Verify that the draft meets program and organizational goals Review and discuss all assumptions Make adjustments, based on goals and capacity, to match income and expenses Review final draft for all goals and objectives 8. Approve budget Present to any committees as needed Present to the board for approval 9. Document budget decisions Create a consolidated budget spreadsheet and file Write down all assumptions 10. Implement budget Assign management responsibilities Incorporate into accounting system Monitor and respond to changes as needed 8

11 Step 1: Determine Timeline Set target dates and timeline: 1. Board should approve the budget before the new fiscal year begins 2. Consider the number of board and/or committee conversations desired, then work backwards to determine process timeline 9

12 Establish target dates for board and/or committees to have the following conversations: Step 2: Agree on program and organizational goals Step 3: Thorough review of current financial status Step 4: Agree on budget approach Step 7: Review draft budget Step 8: Approve budget Establish target dates for staff to: Step 5: Develop draft expense budget Step 6: Develop draft income budget Step 7: Review draft budget and make necessary adjustments 10

13 Step 2: Agree on Goals 1. Prioritize programming goals 2. Set organizational financial goals 3. Clarify annual goals from strategic plan Example program goal Increase youth program to two new elementary schools Budget impacts New staff Travel costs Artists costs Example organizational goal Build cash reserve to two months of expenses Budget impact Must have surplus 11

14 Step 3: Understand Current Financial Status Review current year income and expense compared to budget Forecast to the end of the year Analyze and understand any variances 12

15 Balance Sheet: Financial Position Statement of financial position as of a specific date Assets: what we own Liabilities: what we owe Net Assets: what we re worth 13

16 Step 4: Agree on Budget Approach Assign roles and responsibilities Agree on authority to make decisions How will budget assumptions be reviewed? Who has authority to make decisions about assumptions? Budget approach Bottom up budgeting: Gather input and combine Top down budgeting: Establish overall budget and assign Combination 14

17 Budget Considerations Goal to produce operating surplus Dollar amount or percent of annual budget Operating reserve goals Other designated or reserve funds Budgets with a deficit Expenses greater than income results in deficit When to use carryover from prior years Grant funds for multi-year time periods Depreciation Inclusion of depreciation in budget Budget surplus with depreciation Benefits of funding depreciation Level of uncertainty Acceptable level of risk or uncertainty in income budgets Acceptable contingency amounts or line items Flexibility in developing and managing budgets 15

18 Step 5: Develop Draft Expense Budget Project the costs of achieving programming and organizational goals. Start with current expenses What expenses will stay the same? What expenses will be different? Methods Incremental: using past experience with small change Zero-based: review all items as if they were new Budgeting new types of expenses 16

19 Types of Expenses Step 5: Develop Draft Expense Budget Contractual and mandatory expenses Leases for space and equipment Existing contracts Insurance required by contracts Required taxes and insurance for staff Fixed expenses Fixed expenses are the same no matter what activities Examples: rent, heat, phones, insurance, audit Salaries and benefits for Executive Director and Program Manager Variable expenses Variable expenses depend on artists, activity levels, and complexity of the program Examples: artists fees, technical requirements, travel and accommodation, marketing and advertising costs Wages and benefits for hourly labor 17

20 Personnel Expenses Step 5: Develop Draft Expense Budget Budget your largest expense type first. Salary and wage expenses List current staff salaries and hourly wages Estimate salary and wage adjustments and raises Plan for needed positions and related salary levels Estimate how staff time will be allocated to programs and administrative activities Employee benefits and taxes Mandatory costs for employer portion of social security and Medicare taxes Mandatory costs for unemployment and workers comp insurance Budget for employee insurance, retirement plans Benefits can be budgeted as a percent of salary or detailed per staff person Obtain projected costs for all benefits Review benefit plans for possible modifications Changes to benefit types or costs may require deeper discussions 18

21 19

22 Other Expenses Step 5: Develop Draft Expense Budget Line by line expense review and analysis What will be the SAME as the current year? What will be DIFFERENT from the current year? Factors to consider Cost increases due to inflation and price changes Changes in variable expenses due to changes in programs Changes in expenses needed to achieve specific goals, such as marketing or development Contractual changes in expenses such as rent Changes in expenses to build organizational infrastructure Building in cushions or contingency amounts 20

23 Programming Budget Worksheet 21

24 Programming Budget Worksheet 22

25 23

26 Step 6: Develop Draft Income Budget Reflect decisions made regarding program activities. Any new income included in budget needs a plan. Carefully evaluate funding sources Are there changes to current sources of funding? Are there changes to formulas, amounts, or criterion? Review the overall economy and your area of service 24

27 Types of income Support: contributed income Revenue: earned income Grants Consider certainty Committed grants Restricted grants already in-hand Grants from prior funders Grants from identified new funders Grants from unidentified sources Restricted and unrestricted grants Timing of grants may be different from budget year 25

28 Individual and Business Contributions Project using past experience Expectations based on the same fundraising activities Reflect new or reduced fundraising activities planned Assign responsibility and timeline for activities Special Events Project using past experience Assumptions for new or different results Budget gross fundraising event income and all expenses Assign responsibility and timeline for activities 26

29 Contracts Current and approved contracts Projected contracts Review all terms and requirements Review budgets submitted with proposal or contract Payments based on expected activity or participation levels Payments based on payment agreement or calculations Timing of contract may be different from budget year Earned Revenue Based on expected activities or participation Based on experience New activity based on assumptions Assumptions for revenue per client or activity Review fee levels or amounts Other income Rental income Investment or interest income 27

30 28

31 Step 7: Review Draft Budget Review and discuss all assumptions Include staff, board, and volunteers (if appropriate) Complete a draft budget when there is still time to review Verify that all contract and grant commitments are met in the budget Double check that the budget meets program and organizational goals Be sure that all the parts of the budget, including all programs and projects, roll up to the total Finalizing the Budget Make adjustments, based on goals and capacity, to match income and expenses When the budget shows a deficit (loss) Prepare for lower expenses Prepare for more income Final budget must be realistic and backed up with work plans to support the assumptions What needs to be done to generate the income in the budget? How will the expense budget be managed? 29

32 Final Budget 30

33 Step 8: Approve Budget Present to any committees as needed Present to the board for approval Approve before fiscal year begins Committee and board review and approve assumptions as well as the numbers Step 9: Document Budget Decisions Create a consolidated budget spreadsheet and file. Write down all assumptions. 31

34 Budget Scenarios Plan B budget What if income is much less than projected? It is valuable to be prepared if reductions need to be made Variable expenses are the easiest to reduce Requires agreement on priorities Core, or baseline, budget May be difficult to predict 12 month period with any certainty Develop a baseline budget of fixed expenses and most reliable income Use project/event budgets for additional expenses contingent on available income Wish list budget What if you receive more income than expected? Helpful to have advance agreement about priorities and costs Consider impact on fixed expenses and administrative needs 32

35 Step 10: Implement Budget Assign responsibility for monitoring and controlling the budget Financial staff Development staff Program managers Executive director Finance committee Board of directors Incorporate into accounting system Break the budget down into monthly amounts when activities will occur Review monthly Compare actual income and expenses to budget Understand variances Monitor and respond to changes as needed Significant, material differences 33

36 Income Statement with Variance 34

37 Mid-Year Evaluation Complete a mid-year projection of probable financial results for the year Changing the Budget Change the budget only if new budget is materially different Based on significant changes in assumptions, new income sources, new activities Consider existing grant agreements and contracts 35

38 10 Steps of Budgeting 1. Determine timeline Set target date for board approval Allow time for each step and for review and discussion Approve before fiscal year begins 2. Agree on goals Prioritize program delivery goals Set organizational financial goals Clarify annual goals from strategic plan 3. Understand current financial status Review current year income and expense compared to budget Forecast to the end of the year Analyze and understand any variances 4. Agree on budget approach Assign roles and responsibilities Agree on authority to make decisions Agree on how much uncertainty can be included (how many unknowns) 5. Develop draft expense budget Determine costs (expenses) to reach program goals Determine costs to reach organizational and strategic goals 6. Develop draft income budget Project income based on current fundraising and revenue activities Project new income based on new activities 7. Review draft budget Verify that the draft meets program and organizational goals Review and discuss all assumptions Make adjustments, based on goals and capacity, to match income and expenses Review final draft for all goals and objectives 8. Approve budget Present to any committees as needed Present to the board for approval 9. Document budget decisions Create a consolidated budget spreadsheet and file Write down all assumptions 10. Implement budget Assign management responsibilities Incorporate into accounting system Monitor and respond to changes as needed 36

39 How to Use Today s Workshop Review the annual budget for income and expense assumptions and documentation Discuss how the budget was developed Review reports of actual results compared to budget for effectiveness 37