BUDGETING FOR NONPROFIT ORGANIZATIONS © 2012 DALE NEEDLES

PURPOSE OF THE PRESENTATION Review the Purpose, Benefit & Best Practices of Budgeting Types of Budgets, Budget Pyramid and Roles & Responsibilities The Budgeting Process Budget Policies Sample Budget Templates Exercise on Calculating Indirect Rate

WHAT IS A BUDGET? A Budget is the Financial Plan of what a nonprofit organization expects to accomplish over a period of time It is also a Financial Tool and is one of the keys to an organization’s financial stability

WHAT IS BUDGETING? More specifically, Budgeting is a Financial Plan: For receiving and spending specific amounts of money In specific categories To get specific things done Within a set period of time With a monitoring mechanism _______________

BENEFITS TO ORGANIZATIONAL BUDGETS In addition to being a tool to help an organization become financially stable, the budget Helps organizations focus on short and long term goals Provides a financial road map for the staff to follow Helps management and board provide oversight Provides stakeholders a measure of accountability and transparency

QUALITIES OF AN EFFECTIVE BUDGET Thoughtful and Deliberate Realistic Consistent Flexible Inclusive Measurable Ongoing Process

BEST PRACTICES Make Planning part of Organizational Culture Align Strategic and Annual Operating Plans Drive Collaboration between Functions Adapt to Changing Conditions

BEST PRACTICES (CONTINUED) Identify Organizational Drivers Focus on Content that is Material to the Organization Be Timely and Accurate Build into Planning Process an Assessment Mechanism

TYPES OF BUDGETS Annual Operating Budgets Cost Center/Department Budgets Project/Activities Budgets Capital Budgets Scenario Budgets

BUDGET PYRAMID Organization Budget Cost Center or Department Budget Project/Activity & Capital Budgets

ROLES & RESPONSIBILITIES BoardCEOCFOTeam LeadersManagersAll Staff

BUDGET PROCESS Develop Budget Policies Establish Budget Calendar Identify Organizational Priorities Determine key Budget Assumptions/Parameters

BUDGET PROCESS (CONTINUED) Identify Specific Annual Goals Develop Project/Activity & Capital Budgets Development Department Budgets Develop Cash Flow Projections

BUDGET PROCESS (CONTINUED) Consolidate Department Budgets Develop Budget Scenarios (optional) Review & Revise Finalize Budget and Prepare Budget Package for Board

BUDGET PROCESS (CONTINUED) Board Review and Approval Review Final Budget with Staff Monitor and Reporting on Progress meeting Budget Goals Budget Revision as necessary

BUDGET POLICIES For Identifying Annual Priorities and for Setting Organizational Annual Goals For Projecting Revenue & Expenses For Allocating Shared and Indirect Costs

BUDGET POLICIES (CONTINUED) For Authorizing Resources For Modifying the Budget For Accessing Reserve Funds

ESTABLISHING THE BUDGET CALENDAR Lists Major Tasks Identifies Who is Responsible Establishes Overall Timeframe & Specific Deadlines

SAMPLE BUDGET CALENDAR DeadlineMajor Tasks Who is Responsible DateMeet to Review Org PrioritiesExecutive Team/BD DateCommunicate Priorities to StaffET DateSet Budget ParametersET DatePrepare Budget TemplatesCFO DateDistribute Budget TemplatesCFO DateTeam Leaders meet with MgTeam Leaders DateDraft Budgets are PreparedTeam Leaders/Mgs DateDepartment Budgets ConsolidatedCFO DateAnnual Budget is FinalizedET DateBudget Package is Presented to BDCFO/ET

BUDGET ASSUMPTIONS Budget Assumptions will include: Organizational Priorities Overall Growth Projection Goal Staffing Projections Guidelines on adding new projects and/or activities

ANNUAL GOALS After Organizational Priorities are Identified: Set clear annual goals that are aligned with org priorities Develop Action Plan to achieve these goals Determine the resources/budget needed to carry out the Action Plans

BUDGET METHODOLOGIES Zero-Based Budgeting Incremental/Percentage Increases Allocation of Shared Costs Cost Recovery for indirect expenses

ORGANIZATIONAL REVENUE BUDGET List sources of revenue Review Past History Determine likelihood of funders and sources renewing Make list of potential new funders and rate likelihood of securing funding from them Develop Budget scenarios – best case and worst case (budget somewhere in the middle)

ORGANIZATIONAL REVENUE BUDGET INCOMEFY 2012FY 2011% Increase Govt Grants 550, ,00010% Fnd Grants 330, ,00010% Businesses 40,000 35,00014% Individual 150, ,0007% Events 20,000 0% Fees 50,000 45,00011% Earnings 10,000 0% Total 1,150,000 1,050,00010%

ALIGN REVENUE SOURCES TO FUNCTIONAL EXPENSES Program Fundraising General Management Pooled Expenses

BUDGET LINE ITEM EXPENSES Personnel Contract Services Office Rent Supplies Communications Travel/Meeting Marketing

ALLOCATION OF SHARED COSTS & OVERHEAD What are pooled and/or shared Costs? How do you allocated Shared Costs? = Total Personnel Exp for a Specific Function Total Personnel – Pooled Personnel Exp What are indirect expenses and/or overhead? How do you allocated indirect expenses? = Total Functional Expense Total Org Expenses – Mg & General

SUMMARY OF ORGANIZATIONAL EXPENSE BUDGET EXPENSESProgramMg/GenFRSharedTOTAL Proj 1Proj 2 Client Services 250, ,000 Personnel 100,000 75, ,000 Consultants 10,000 30,000 Offices Expenses 150,000 Communications 60,000 Travel 20,000 5,000 15,000 60,000 Total 380,000 80, , ,000 1,150,000 % of Pooled Exp29% 21%

SHARED COST/POOLED EXPENSES ALLOCATION Total Personnel Exp for a Specific Function / Total Personnel – Pooled Personnel Exp Program Personnel = 200,000/ (350, = 57% Mg & General = 75,000/ (350,000-0) = 21.5% FR = 75,000 / (350,000 – 0) = 21.5%

CONSOLIDATED BUDGET (FORMAT A –CONT.) ProgramsMg/GenFRTOTAL EXPENSES Client Services 500,000 Personnel 200,000 75, ,000 Consultants 20,000 10,000 30,000 Offices Expenses 87,000 31, ,000 Communications 34,800 12,600 60,000 Travel 40,000 5,000 15,000 60,000 Total 881, , ,100 1,150,000

OVERHEAD ALLOCATION Total Functional Expenses / Total Org Expenses – Mg & General Program Expenses = 881,800 / (1,150,000 – 124,100) = 86% 86% x 124,100 (MG & General) = 106, ,726 / 881,800 (Programs) = 12%

CONSOLIDATED SUMMARY BUDGET (FORMAT A) INCOMEProgramsMg/GenFRTOTAL Govt Grants 500,000 25, ,000 Fnd Grants 300,000 15, ,000 Businesses 31,800 4,100 40,000 Individual 50, ,000 Events 10,000 20,000 Fees 20,000 30,000 50,000 Earnings 10,000 Total 881, , ,100 1,150,000 EXPENSES Total 881, , ,100 1,150,000

ORGANIZATIONAL SUMMARY BUDGET (FORMAT B) INCOME TOTALPercent Govt Grants 550,00048% Fnd Grants 330,00029% Businesses 40,0003% Individual 150,00013% other 80,0007% Total 1,150,000100% EXPENSES Program Services 881,80077% Fundraising 144,10013% Management & General 124,10011% TOTAL 1,150,000100%

SAMPLE CASH FLOW BUDGET JanuaryFebruaryMarchAprilMayJune Income 100,000 85, ,000 85,000 95, ,000 Expenses 95,822 95,833 Difference 4,178 (10,822) 4,178 (10,833) (833) 4,167 Cash at Beginning of Month 250, , , , , ,867 Cash at End of Month 254, , , , , ,034

FINAL BUDGET PACKAGE Overview of Key Budget Policies and Procedures Budget Narrative highlighting organizational priorities, annual goals, budget assumptions and financial implications Organizational Summary Budget compared to past year(s) by function and by Line-Items Detailed Breakdown of Department Budgets

MONITORING THE BUDGET Monthly, Quarterly and Annual Actual to Budget Reports Cash Flow Reports Donor Reports Financial Dashboard

REVISING THE BUDGET Generally happens when there is a short fall between budgeted revenues and expenses Generally requires Board Approval if over 10% Budget revisions may require one of the following to cover the short fall: 1) Cutting Expenses 2) The use of organizational reserves

PROJECT BUDGET FOR FUNDERS Reflects the True Costs of the Project – including shared expenses and indirect expenses Includes a breakdown of what the donor’s funds will be cover in relationship to the entire project. Includes a detailed narrative explaining each line item Includes a budget to actual reporting mechanism

SAMPLE PROJECT BUDGET FOR FUNDER Foundation YOther FundersTotal Govt Grants 250,000 Fnd Grants 112,,000 53, ,000 Individual 50,000 General Funds 28,808 Total 112, , ,808 EXPENSES Client Services 50, , ,000 Personnel 25,000 75, ,000 Consultants 5,000 10,000 Offices Expenses 10,000 33,500 43,500 Communications 5,000 12,400 17,400 Travel 5,000 15,000 20,000 Total Direct Expenses 100, , ,900 Indirect/Overhead Rate (12%) 12,00040,908 52,908 TOTAL 112, , ,808

REPORT TO FUNDER ActualBudgetVarianceActualBudgetVariance Foundation YTOTAL Project Govt Grants 250, % Fnd Grants 112, , % Individual 45,000 50, % General Funds 31,680 28, % Total 112, , , % EXPENSES Client Services 52,000 50,000 2, , , % Personnel 25, , , % Consultants 5, , % Offices Expenses 8,000 10,000 (2,000) 44,000 43, % Communications 5, ,000 17, % Travel 5, ,000 20, % Total Direct Expenses 100, , , % Indirect/Overhead Rate (12%) 12, , % TOTAL 112, , , %

CONCLUSION The Budget charts the direction for allocating and maximizing the use of resources in order to achieve the organization’s strategic and annual goals The Budget process is an integral part of the annual planning process The Budget includes indicators and a monitoring mechanism for measuring and reporting on progress towards achieving the financial goals

MAPPING EXERCISES Exercise 1 Calculate your organization’s Overhead Rate Total Program Expenses / Total Org Expenses – Mg & General Program Expenses = 881,800 / (1,150,000 – 124,100) = 86% 86% x 124,100 (MG & General) = 106, ,726 / 881,800 (Programs) = 12%

RESOURCES Budget Building Book for Nonprofits by Murray Dropkin and Bill LaTouche Financial Planning for Nonprofit Organizations by Judy Blazek “Indirect Costs: Practices and Perspectives” by Skip Henderson and Jan Masaoka

QUESTIONS & DISCUSSION ?