It’s a strange but true statement: your budget will never be “right.” You’ll be over budgeted on some items and under-resourced on others. Predicted income will exceed expectations, or there will be a shortfall. Unexpected expenses mount on specific projects.
And all of this is okay. Budgets evolve, and that’s not only okay, it’s also expected. Here’s why budgeting should be viewed more as a business planning activity and less a “once and done” accounting function. Thinking strategically about budgeting and planning and working all year long with your budget as a business tool, will help your organization thrive.
Budgeting as a Business Planning Activity
Many people think of budgets as the purview of the accounting department. The best budgeting process, however, is collaborative. Program managers should work with the accounting team to analyze their budgets. The ensuing discussion around budget items should encourage reflection and analysis about program activities, focusing on those that support the organization’s mission and margin-generating activities.
For example, as you plan the annual budget, you may find that some program activities performed below expectations. Reviewing the data together, accounting and program leaders can decide if continuing the program makes sense or whether it should be changed in some way. Sitting down together to review the budget opens the door to important conversations that can lead to significant improvements. This reflection process is a healthy part of business planning and goes beyond financial planning.
Best Practices for Nonprofit Budgets
Budgets are “living documents.” This means that they grow and change over time. A good budgeting process allows for flexibility. Part of sound budgeting practices is regularly checking budgets and updating them based on the available data.
Here are some best practices for checking and updating nonprofit budgets:
- Regular Review: Schedule regular budget reviews with program areas, such as monthly or quarterly reviews, to compare actual income and expenses against the budget. This helps identify any discrepancies and allows for timely adjustments.
- Adjust for Changes: Be flexible and ready to amend the budget as needed. Financial positions can change throughout the year, so it’s important to update the budget to reflect new realities.
- Track Cash Flow: Monitor cash flow closely to ensure the organization has enough funds to cover expenses. This includes tracking both incoming and outgoing cash.
- Use Technology: Utilize budgeting software and tools to streamline the process and improve accuracy. These tools can help automate calculations and provide real-time data.
- Document Assumptions: Clearly document the assumptions made during the budgeting process. This helps with understanding the basis of the budget and makes it easier to explain any variances.
- Plan for Contingencies: Include contingency plans in the budget to account for unexpected expenses or changes in funding. This ensures the organization is prepared for any financial surprises.
- Communicate Regularly: Keep open lines of communication with all stakeholders about the budget status and any changes. Transparency helps build trust and ensures everyone is on the same page.
By following these best practices, nonprofits can maintain a healthy financial position and effectively manage their resources.
As you can see, budgets aren’t once and done. They evolve. Frequent feedback, adjustments, and discussions allow for much-needed planning and flexibility that helps an organization succeed.
Welter Consulting
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.
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