Category

Budget

Budgets Evolve, and That’s Okay

By | Accounting, Accounting Software, Budget, Nonprofit | No Comments
Budgets Evolve, and That’s Okay

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.

New Law Raises DOL Minimum Salary Threshold for Overtime Pay – Are You Ready?

By | Accounting, Budget, Government, Nonprofit, Overtime | No Comments
binders labeled salary and overtime, with printout, calculator, and magnifying glass, Minimum Salary Threshold for Overtime Pay

Salaried employees are typically exempt from overtime, but a new law from the U.S. Department of Labor slated to become effective on July 1, 2024, may change that for up to one million people. What is this law and how might it impact your business? We’ll look at the law, what it means for the average business, and what you need to do now to prepare for it when it becomes effective.

What Is the DOL Minimum Salary Threshold Raise?

The DOL released a final rule on April 23, 2024, which raises the minimum salary threshold for the standard exemption applied to executive, administrative, professional, and outside sales employees, as well as certain computer employees, exempting them from minimum wage and overtime protections under the Fair Labor Standards Act (FLSA). These exemptions are typically called “white collar” exemptions meaning that so-called white-collar jobs—usually salaried office jobs—do not normally qualify for overtime. The new law may change some of that.

FLSA covers organizations with two or more employees earning $500,000 or more in annual sales. It also includes education institutions and hospitals caring for the sick, mentally ill, or elderly. If your organization falls into these categories, you must adhere to the overtime laws and the new rollout of the minimum salary threshold increase.

What Are the New Salary Thresholds?

The threshold for the EAP exemption’s minimum salary will increase to $844 per week (approximately $43,888 per year) from its current level of $684 per week (approximately $35,568 per year) on July 1, 2024, and then to $1,128 per week (approximately $58,656 per year) on Jan. 1, 2025

The second increase marks the threshold nearly $3,600 more than the previous Department of Labor proposed overtime rule back in 2023. Increases for highly compensated employees’ (HCE) salary are also more than originally proposed.

The new minimum annual compensation threshold for Highly Compensated Employees increases to $132,964 on July 1, 2024, and then to $151,164 on Jan. 1, 2025

How Can Your Organization Prepare for the Change?

Now is the time to take steps to prepare for the new law to take effect. While several states have filed lawsuits to block the law from going into effect, it is uncertain whether this will happen. You should proceed as if the law will indeed be effective on July 1, 2024, and plan accordingly.

First, consider your options. You can adjust an employee’s salary or reclassify them as nonexempt. However, changing classification from exempt to nonexempt may create additional considerations such as how compensation and bonuses impact overtime pay owed to a reclassified employee.

Additionally, changing employees from exempt to nonexempt increases your record-keeping responsibilities. Do you have the right nonprofit accounting software to handle this step? If not, is it time to upgrade or seek new software?

Consider also how reclassifying employees may impact your budget and employee morale. From a budgetary standpoint, you may incur higher overtime expenses, which can strain money you may have set aside to pay bonuses. From an employee morale perspective, benefits tied to compensation may change. Some employees may view the change as a demotion. You may need to think through how you will roll this out. Speak with your accounting and human resources team and consider all options.

Another area of consideration is around workplace policies, such as travel, or equipment use. If you currently restrict nonexempt workers from travel or from using equipment while traveling, you may need to revise your policies if you choose to reclassify people from exempt to nonexempt.

Work with Your Accounting Consultant 

There are many, many considerations when this law goes into effect. Each organization is different, with complex needs and considerations. For our current clients, we encourage you to speak with our team to determine the wisest course of action with minimal disruption to your organization and its finances while fully complying with the law.

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.

A Guide to Nonprofit Budgeting: Navigating the Essentials

By | Accounting, Accounting Software, Budget, Nonprofit | No Comments
A Guide to Nonprofit Budgeting, people at desk or table with tablet, spreadsheets, and ledger

Budgets provide the financial foundation upon which an organization must run all its activities. Without a budget, it is almost impossible to manage cash flow. Budgets provide structure, organization, and financial stability that helps you with strategic planning.

Although it’s possible to run a company or a nonprofit solely off cash flow without budgeting for specific activities, it makes planning for steady growth and new activities very difficult. Budgets serve as both guidelines and tools, helping organizations plan for activities, manage cash flow, and view expenses. Here, we’ll share with you the main types of budgets used by nonprofits, as well as discuss each section of the budget in greater detail. Lastly, we’ll talk about ways to manage nonprofit budgeting to make the process go smoothly.

Key Components of Nonprofit Budgets: Income (Revenue) and Expenses

We can break nonprofit budgets into two simple categories: income and expenses. Income refers to money coming into the organization, and expenses refers to the money the organization spends. All financial activities can be grouped under each category. The difference between income and expenses results in a surplus when the difference is positive (more income than expenses) or a loss or deficit (when expenses exceed income).

Source of Income

Your organization probably has several sources of income. Some of these income sources are unique to the nonprofit world. Typical sources of income include donations, program fees, membership fees, sales of products or services, grants, and special events.

Because nonprofits invest their income into their programs and services to fulfill their mission, they must track carefully where revenues come from and how they are spent. Sometimes, nonprofit income is tied to specific programs or activities. For example, donors may indicate they wish their donation to be used only for a specific program or added to the general operating fund. If the donation is intended for a specific program, the organization must ensure that they budget the funds or add them to the fund for that specific activity.

A good example is a nonprofit animal shelter. Many have “spay and neuter funds,” which are set up to pay for low-cost or free spay/neuter programs to address the surplus of homeless animals in the local community. If donors give to that program, the shelter must honor the donor’s wishes and ensure that the money is spent on that program. They cannot reapportion the funds for the general budget to pay for advertising, for example, or for salaries and wages; funds raised for a specific purpose must go to fulfill that purpose.

Another example of how nonprofit revenues must be tracked differently from for-profit income streams is grants. Grants are often given for highly specific purposes or to fund specific programs. Granting organizations often require careful accounting of how the funds are spent.

Importance of Diversifying Income

Although we spoke at length about two sources of income—donations and grants—nonprofits receive income from many places. They may sell products or charge a fee for services. They may receive donations of goods. Each of these income categories requires careful tracking and recording of the income received.

As in the for-profit world, smart nonprofits diversify their income as much as possible. It’s never a good idea to put all your eggs in one basket or rely solely on one channel for income. A nonprofit that relies on a single large grant to fund multiple program activities may be in deep trouble if the grant doesn’t continue, for example. A diverse income stream of donations, fees for services or goods, grants, and other sources of income ensures that even if trouble hits one category, it won’t jeopardize the entire budget.

Expenses

Expenses refers to everything your organization must spend money on to keep running: operational costs (overhead, utilities, telephone and internet expenses, professional fees, insurance), rents or licenses, fixed assets such as furniture and computers, marketing and sales, salary, and benefits. You must track all your expenses to ensure that you have a clear and detailed view of how your organization spends its money.

Once you track expenses, it becomes clear which categories are consuming the largest share of the budget. You can then take steps to either minimize this spend or manage it prudently. There are many areas where expenses can be cut without compromising the quality of the services you deliver. For example, you may be able to cut back on insurance expenses by shopping for and comparing different policies and coverages. Or you may find that hiring remote employees helps you keep rent costs low because you don’t need as large an office building. These are just examples of how expenses can be managed to keep them low.

The Most Common Types of Budgets Used by Nonprofits

There are many ways in which you can create a budget. If your organization has a budget in place, you may use that as a starting point each year and adjust income and expenses based on projections. You may also find that a new approach to budgeting is helpful.

The three most common types of budgets used by nonprofits include:

  1. Program-Based Budgeting: This approach is widely used by nonprofits as it aligns budget allocations directly with the organization’s programs and initiatives. It allows for clear tracking of resources allocated to each program, making it easier to assess the effectiveness and impact of those programs.
  2. Zero-Based Budgeting (ZBB): While not as prevalent as program-based budgeting, ZBB is still commonly used by nonprofits, especially those seeking to ensure maximum efficiency and accountability in resource allocation. ZBB encourages a thorough review of all expenses, promoting cost-conscious decision-making throughout the organization. Zero-based budgets start at zero each year, with budgets built from scratch. Each expense and income must be estimated from scratch based on current conditions.
  3. Outcomes-Based Budgeting: Nonprofits are increasingly adopting outcome-based budgeting to demonstrate the impact of their activities and investments. By linking budget allocations to desired outcomes or impacts, organizations can better prioritize resources and measure their effectiveness in achieving their mission.

Ready, Set, Budget! The Budgeting Process

Creating a good budget takes time. Leave at least several weeks to build your budget and, if you need to gain approval from your board or managers, time for review, feedback, revision, and final approval.

Depending on the type of budget you are building, there are several ways to begin the process. You’ll need to understand all the categories you have to account for in the income and expense areas. Gather the necessary information: previous years’ income statements and cash flows, sources of revenues, and the like, as well as expenses.

Determine a reasonable percent by which you think you can increase both income and expenses. It’s natural to hope for the best, but it’s better to conservatively estimate increased income. If you plan to increase income, will you need to spend more on specific activities, such as marketing and donor relationships, to achieve your goals? All of these must be considered as part of your strategic plan as well as the budgeting process.

Your organization’s accountant or bookkeeper is instrumental in the budgeting process. Schedule time to review income and expenses together. Then, connect with staff as needed to gather additional input.

A budget is a living document. Like a good strategic plan or marketing plan, adjustments should be made to it as the year progresses (it’s not a once-and-done activity). Schedule periodic budget reviews and make necessary adjustments to income projections or expenses as you need to ensure an end-of-year surplus that can be invested back into the organization’s mission. A quarterly review may be sufficient. Some organizations conduct budget reviews monthly, others quarterly or twice a year. At a minimum, an annual budget review and budgeting cycle are necessary for a healthy financial picture.

Tools to Make Budgeting Easier

There are several types of accounting software that can make nonprofit budgeting easier. Spreadsheets are frequently used but have several drawbacks. They must be manually updated and can grow to be quite complex depending on the number of programs you’re managing. They also lack good reporting functions.

Many small business software packages seem like they would be a good step up, but these also have several drawbacks. While they can automate many tasks and produce good reports like balance statements, cash flows, and similar reports, they may require extensive customization to track income and expenses by program, or track donation information. They are not built for the unique requirements of nonprofit accounting.

Nonprofit accounting software is built specifically for nonprofit budgeting. There are packages for nonprofits and government accounting, so you start with a system designed with your specific income and expense needs in mind. Some offer cloud or browser-based versions, which make it easy for remote employees and auditors to log into the system to perform the work.

Welter Consulting

Whether you are new to nonprofit budgeting or highly experienced at it, if you need assistance choosing your budgeting method, selecting nonprofit accounting software, or moving from spreadsheets or another software to a new nonprofit-specific accounting platform, contact Welter Consulting. We are happy to help.

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.

Give Your Budget a Checkup with These Best Practices

By | Budget | No Comments

Budgets aren’t set in stone. Rather, they evolve over the fiscal year. They require periodic checkups and adjustments to make them work for, rather than against, an organization’s needs.

If it’s been a while since you’ve reviewed this fiscal year’s budget, take time now to go over the budget. Work with your accounting person or department to review projected expenses, income, and more, and give your budget a thorough checkup and tune-up with the following nonprofit budgeting best practices.

Nonprofit Accounting and Budgeting Best Practices

  1. Continuous monitoring: Budgets must be monitored continuously. This includes using both operational processes and the right software to provide up-to-date information. Continuous monitoring enables you to take action quickly should you need to adjust the budget based on actual and projected figures. It also lets you catch and correct mistakes quickly. Schedule time for budget reviews each month and add it to your calendar now.
  2. Assess and review: In addition to monitoring the budget to make sure there are no mistakes, assess and review the major line items periodically. You may need to shift funds from one budget to another or update lines based on cash flow. Special projects, especially those that take more than a year, may need to be treated separately in the budgeting system so that you can maintain, monitor, and review the project budget within a different timeframe than the organization’s general budget.
  3. Ask key questions: During the budget review, ask key questions. These questions may include:
    1. Did you gain or lose any important sources of funding?
    2. Do any granting institutions need updates on how their funds are being spent?
    3. Are there any new economic challenges on the horizon? If so, how can you adjust the budget to prepare for them?
    4. Is there any important or unexpected need that will require special funding?
    5. Are any lines running low? Expecting a surplus?
  4. Revise the budget according: Budgets are working documents, not final outputs. It’s fine to revise the budget and to make adjustments as needed to accommodate changing situations.
  5. Review bylaws and budgets: Bylaws may address budgetary issues. Review the organization’s charter and bylaws now to make sure that any changes you make to the budget follow the bylaws.

Communicate Budget Updates to Your Team

Lastly, budget checkups shouldn’t end with closing the computer or signing off on the updates. You must take the time to provide your staff with an update on the budget.

You may wonder why this is important considering that most people on your staff don’t have budgetary responsibilities. It’s simple: everyone needs to know where the organization’s finances stand. They may not need all of the details, but they need to know that there’s enough money to continue operations, address problems, and reinvest. If there’s a shortfall, they need to know that too, so they can take measures to conserve funds and cut expenses.

It may help to use data visualizations such as graphs and charts to explain the big picture to your staff. This is where cloud-based nonprofit accounting software comes in handy. Such programs offer the ability to run reports using up-to-the-minute data and provide easy-to-understand visuals to accompany your presentation.

Now’s the time to review, revise, and adjust the budget. Make an appointment with your accountant or CFO today to begin the process. And, be sure to schedule the next review now, too. Remember, budgeting is an ongoing process, not a final report.

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 Welter Consulting at 206-605-3113 for more information.