Board Development

Board Development Program

Budgeting for Not-for- Voluntary Sector Services Branch
Alberta Culture and
Community Spirit
Profit Organizations Phone: 780-427-2001
Fax: 780-427-4155

E-mail: [email protected]
What is a budget? www.albertabdp.ca
An operating budget is a financial plan of action prepared for a specific
Sponsored by
period of time. It is the estimated cost of operating shown in financial terms.
This is the most common type of budget and references to “budgets” in this
Information Bulletin refer primarily to operating budgets.

Budgeting is putting together a realistic financial plan for the organization.

The board of a not-for-profit organization must plan by setting organizational
goals and determining priorities. These are outlined in the strategic plan. The
organization must then determine the dollars needed to carry out those goals
and priorities, and this information is reflected in the annual operating budget.

Budgeting is a process. You take information or facts that you know to be

true, make reasonable assumptions about the future and project forward on
what will be coming into the organization in the way of revenues and what
will be flowing out of the organization in the way of expenses. These
financial projections are estimates and not “guesstimates”. They are well
thought out using historical data as well as what you know about foreseeable
future events. For example, if you had salary expenses of $100,000 for the
prior year for three people then you would not use this same amount in the
next year’s budget if you know you are hiring two additional staff.

During the budgeting process you take similar items and estimate the amount
that will either be spent (expenses) or received as income (revenue) over a
period of time. For example, you might have a category called office supplies
where you estimate what will be spent for office supplies for the period. Photocopying and
Your budget will show a summary total amount called office supplies distribution of this
expenses rather than a listing estimating the cost of each item under this publication is permitted.
heading. Use the same categories as reflected in your chart of accounts. Re-publishing of sections may
only be done with the
Budgets must be timely and accurate. They are prepared with a lot of thought, consent of the Board
time and effort and the approved budget must then be reviewed throughout Development Program.
the year. The organization as a whole must agree to the budget cycle and the

First Printing – 2009 1

Board Development:
priorities and goals of the organization as reflected in financial terms in the
Budgeting for Not-for-Profit
Organizations annual budget.

The approved budget forms the basis for action. The draft budget should
be provided to the board members in advance of the board meeting so they
have ample time to review. Once the budget has been approved, it is
usually passed over to the senior staff person for management and
implementation. Remember that the board is a collective body and no one
board member can make changes to an approved budget.

Preparing a budget for a not-for-profit organization can be on a small scale

or a much bigger scale and the complexity is affected by the size and
nature of the programs, size of the budget and number of funders and
employees.

Steps involved in budgeting

The budget is the financial First you must determine when the budget is to be presented to the board.
plan of action based on the Then back it up about three months to give adequate time for preparation.
board's decisions for the You need to gather information, prepare the budget, get it approved and
future of the organization. finally, monitor the budget throughout the year.
1. Gather budget information
• Ask for information and direction.
• Obtain input from key stakeholders.
• Link the budget to the organization’s goals and priorities.
• Be aware of budgeting policies and other financial policies.
• Gather information from the prior period or periods.
2. Prepare the budget
• Use facts and document your assumptions.
• Facts plus assumptions equals projections.
• Allow yourself plenty of time to think things through.
• Forecast the revenues and compare to your estimated
expenses.
• Follow the financial policies and budget guidelines of the
organization.
• Identify fixed and variable costs.
• Be realistic.
3. Receive approval
• Finalize the budget and present to the board for approval.
• Be organized when presenting the budget and be prepared to
answer questions.
• Make adjustments if new information comes to light during
the presentation.
• Communicate the approved budget within the organization.

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 4. Monitor and evaluate the approved budget
Board Development:
Budgeting for Not-for-Profit
• Identify and review variances. Organizations
• Determine reasons for significant variances.
• Determine whether the organization is on track.
• Review information monthly and be accountable.
• Manage the budget and take corrective action if needed.
• Begin preparing information for the next budget cycle.

Budget preparation
The budget should coincide with your normal annual reporting period. Start the
budget preparation process early as it will always take longer than you think.
Develop a budget calendar with timelines and due dates for key pieces of the
budget process. Make sure that those involved in this collaborative process
know these target dates and the implications if these dates are not met. The budget policies of the board
help create the appropriate
Common sense and good judgment are essential to the preparation of a well degree of board participation in
thought out budget. Always keep good notes on facts and assumptions you budgetary planning and control.
make. This information will be invaluable when you prepare subsequent
budgets. Be familiar with the prior year’s data and events that occurred during
the year. Will similar events occur again during this budget year?

One person does not prepare the budget on their own but rather budget
preparation is coordinated by one person. Take the time to ask for and obtain
information from people in your organization who are ‘in the know’.
Committee chairs can estimate the expenses they are likely to incur during the
year and program coordinators know their programs and the associated costs. A
fringe benefit of involving many people in the budget process is a sense of buy-
in!

Historical data can be obtained from the books and records. However, if you
are using accounting software make sure that all transactions have been
recorded and that the user of the software understands accounting practices and
terminology. Budgets have been prepared based on good data only to find out
later that someone’s interpretation was incorrect.

As the budget preparation cycle should commence prior to the completion of

the current year, be creative but reasonable in estimating revenue and expenses.
If you have ten months of data you may be able to determine a monthly amount
and multiply by twelve. Just be aware of the annual expenses that have not yet
been paid for the year. Historical data provides considerable information but
remember that this information just helps you to estimate what will happen in
the future. A good budget is prepared using historical and other data and is
based on what you expect will occur in the upcoming year.

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Board Development: Do not forget about new projects. If you have requested new grant funding for
Budgeting for Not-for-Profit
Organizations
a specific project and are uncertain as to whether you will get it, it might be a
good idea to prepare two budgets – one with the new funding and one without.
Do not automatically assume that if you have made an application you will
receive the funding.

Including a narrative with your budget numbers helps to explain the basis by
which you prepared the budget. Some of the information might include:
ƒ An overview of the organization and what it does, programs and
projects budgeted for.
ƒ A breakdown of information by program/project identifying amounts
requested.
ƒ The services/benefits that will be provided and why there is a need.

Ensure that safety margins have been built into the budget but do not go
overboard with your estimates.

Budget policies
The budget is a working
document which reflects the It is important to have budget policies that outline budget responsibilities and
joint planning effort of guidelines but the preparer also needs to be aware of other policies that affect
many people. the preparation of the budget. Personnel policies may outline salary increases
and policies on proposed new programs may be in development.
.
Board approved budget policies will outline specific budget responsibilities
such as who has the delegated responsibility for budget preparation. This might
be the Executive Director of the organization, a senior staff person, the
Treasurer or sometimes it is the Finance Committee. Another policy would
clarify whose responsibility it is to monitor the budget, once it is approved by
the board.

The Budget Policy Responsibility Matrix shown below can be a helpful tool.
Clearly identify who is responsible for each area in your organization by
placing an X in the appropriate column.

Responsibility Senior Staff Treasurer The Board

For budgeting preparation

For budget approval

For budget monitoring

For key expenditures decisions

(purchase of capital items,
hiring of new staff, and wage
increases)

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Budget monitoring Board Development:
On a monthly basis you should be comparing the budgeted amounts for Budgeting for Not-for-Profit
Organizations
each category with actual figures. By doing this you are comparing what
you planned to happen with what actually happened.

The board must decide on the type, frequency and nature of reporting
necessary to provide good information on the budget figures vs. actual
revenues and expenditures. This is done by comparing each category and
providing variance information. It is the board’s responsibility to review
and question significant variances between budgeted amounts and actual
amounts.

What if, when comparing budget to actual figures, you note a significant
variance? Ask yourself whether there is a readily apparent reason for this
difference. Or do you have to seek out some answers before you can
determine why it happened? Is there something in the next budgeting cycle
that could be done differently to provide more accurate figures? Has the
board approved an expenditure that was not budgeted for? The existence of budget policy gives
assurance that responsibilities are
assigned and the basis for board
For example, it may look odd that, in the first month of the budget, a large involvement is known.
amount was paid for insurance. In reality it might just be reflecting the fact
that the annual insurance policy was due that month and that the premiums
increased more than was budgeted for.

By monitoring the budget the organization can track whether they are
achieving the goals and priorities set out for the organization. It is important
for governance boards to govern and not get involved in the day to day
affairs of the organization.

Benefits of budgeting
ƒ If not already established, budgeting can force an organization to set
priorities and goals.
ƒ Planning assists the organization to control expenditures and
forecast sources and timing of revenues.
ƒ The budgeting process forces an organization not only to have a
plan but to have deadlines for planning.
ƒ Budgeting can reduce, to some extent, the need to constantly be
reactive as the budgeting process is a proactive approach.
ƒ Good budgeting practices ensure that the organization defines
budgeting roles and responsibilities and sets these out in policies.
ƒ Monitoring the budget helps to ensure that funds are available for all
planned expenditures. It also lets you know the current state of your
finances and helps to control spending.
ƒ Budgeting facilitates monitoring, evaluation and performance
measurement.

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Board Development: ƒ The budget can be used as a communication tool for the organization.
Budgeting for Not-for-Profit ƒ Someone is assigned the responsibility of following the budget.
Organizations ƒ Adherence to budgets can be used as an assessment tool for
performance reviews and in some cases can have an impact on salary
increases.

Types and ways of budgeting

Operating Budget - Reflects projections of revenue and expenses over a
specific time period, usually a one year period. It will include revenues such
as grants and fees for service and operating expenses such as salaries and
program expenses. This is sometimes referred to as the annual budget.

Capital Budget - This budget usually relates to the acquisition of buildings

or equipment and includes major purchases or acquisitions. It shows the costs
of the purchase and the source of funding to cover the costs.

Program Budget - A budget is prepared for each program or service that you
provide to your clients. Most not-for-profits have more than one program.

Line Item Budgeting - Uses the previous year’s budget category actual
amounts as the starting point and then reviews each category.

Zero Based Budgeting - This type of budgeting is often referred to as

budgeting from the bottom up. You start at zero and compile a budget from
scratch with input from many people within an organization. Revenue and
Approval and monitoring of expenses are based solely on future events that you expect to occur and not
the budget is one of the on what was budgeted in prior periods.
most critical jobs of the
board.
Cash Budget or Projection - Based on cash coming in and cash going out
for a specific period of time.

Budget format
The main heading should always contain the organization’s name and period
covered. Revenue and expense items are then listed by category.

Ideally, total revenues and total expenses should always equal when you
prepare a budget, unless you are planning for a specific deficit or surplus
amount.

Next is an example of a yearly budget with actual figures inserted later to

facilitate close monitoring of budget numbers to actuals.

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 Board Development:
XYZ Not-for-Profit Organization Budgeting for Not-for-Profit
Budget to Actuals Organizations
For the Three Month Period March 31, 2XXX

Approved Current Month YTD

(Jan-Dec) (March) (Jan- Mar)
Annual Budget Actual Actual

Revenue:
Fees $ 5,500.00 $ 375.00 $ 4,405.00
Grants 450,000.00 150,000.00 225,000.00
Other revenue 8,000.00 998.45 2,296.54
Total revenue $ 463,500.00 $ 151,373.45 $ 231,701.54

Expenses: For more information, see

Salaries and wages 426,000.00 35,229.11 105,222.13 Financial Responsibilities of Not-
Membership dues 3,500.00 225.00 985.00 for-Profit Boards, a self-guided
Board/committees 6,500.00 626.13 1,256.24 workbook published by the Board
Rent 13,200.00 1,100.00 3,300.00 Development Program and The
Utilities 6,000.00 489.12 1,589.24 Muttart Foundation. Available
Miscellaneous 4,800.00 195.45 4,212.85 online at www.albertabdp.ca
Volunteers 3,500.00 233.26 795.25
Total expenses $ 463,500.00 $ 38,098.07 $ 117,360.71

Surplus/Deficit $ - $ 113,275.38 $ 114,340.83

Budgeting terminology
Assumption - An explanation of the basis for determining an amount
used in the budget e.g. salary increases for the year were calculated at 5%
based on the prior year average of all salary increases.
Cash Flow Projection - Projected cash transactions for the upcoming
period. This projection is often done monthly and starts with cash on hand
plus cash receipts expected less cash disbursements.
Chart of Accounts - A listing of financial accounts used by the
organization and sorted/numbered based on the type of account e.g.
assets, liabilities, revenues, expenses and net assets.
Expenses - The costs of doing business. e.g. salaries and wages, office
supplies and utilities expenses.
Facts - What you know to be true.
Plan - Well thought out ideas of future actions based on experience from
the past, current information and assumptions about the future.

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Board Development:
Budgeting for Not-for-Profit
Organizations Revenue - Money coming into the organization from sources such as fees,
grants and interest income.
Variable costs - Costs that are sensitive to changes in revenue e.g. the total
cost of meals depends on the number of clients.
Variance - The difference between the budgeted amount and the actual
amount.

In conclusion……
• Budgeting is an ongoing annual process.
• The budget is prepared, approved and monitored.
• A good budget reflects the joint planning and collaborative effort of
many people.
• The budget belongs to the organization and to no one individual.
• The board has responsibility for setting policies and for approving the
budget.
About the author: • All board members share in the financial responsibility of an
organization.
Linda Thorne is a Certified
General Accountant. She is
• Good budgeting is the key to good financial management.
a former Board • Accept the fact that no two people will ever prepare the budget using
Development Program the same logic and rationale, so provide good background information
instructor, works in the not- to justify your assumptions.
for-profit sector and has her • Budgets can be changed but must again be brought to the board for
own company – Learning approval.
Opportunities Incorporated. • No financial plan of action is perfect; after all, we cannot foresee
everything that will happen in the future.

Board Development Program

907 Standard Life Centre
10405 Jasper Avenue
Edmonton, AB T5J 4R7