To achieve financial sustainability in your non-profit organization, it is essential to understand the role of budgeting. This is when you attach numbers to your goals and build a tool to help monitor your spending.
In this article, we will discuss the budget for non-profit organizations and provide your complete guides so you can understand this concept much better. So keep reading to learn more about budgeting for non-profit organizations and how it works.
What Are Non-Profit Organizations Budgets?
Non-profit organizations require special scrutiny when it comes to their finances. This is because sources of funds vary, some might be restricted, and some might be based on sustainability and viability of the organization. Successful budgeting process requires commitment from all levels in the organization starting from staff all the way to the board of directors.
So, what’s the budget? It’s essential to make sure the current projects and future projects have the required funding to be completed and are being completed in the most efficient and cost-effective manner. It’s planning and making sure that the organization stays viable and sustainable.
The annual budget is the fundamental building block for managing the day-to-day affairs of the non-profit. It becomes a tool to manage and evaluate performance at all levels of the non-profit.
Non-profit Organization BOD & Annual Budgeting
When discussing a non-profit organization comprising different employees, it is essential to create an annual budget. Who develops the budget within the organization can vary depending on size and complexity of operation within the non-profit. For large non-profit, a full department might be dedicated to such affairs or outsourced to professional assistance. In smaller ones, however, either a staff member, the accountant for the nonprofit or a volunteer can prepare it. Some do outsource the process to ensure completeness and accuracy.
So, what is the role of the Board of Directors? They are entrusted with the task to review and approve the budget. Budgets are normally presented to the board via the Treasurer. It’s discussed In the board meeting and approved if no comments or concerns are voiced by board members.
Once the board members approve the budget for the non-profit organization, it will act as a guide for the entire financial activity in that organization. However, it is essential to keep in mind that if a budget has been made for a non-profit organization, then it does not mean it is going to be highly rigid, and it is going to be a regulation that must be followed.
Sometimes it can change and vary depending on the situation and the financial position of the non-profit organization in that particular year. Non-Forecasted events sometimes happen and require an adjustment to the budget. This is where forecasts during the year take place. In other words, the budget of a non-profit organization is a guide that will help the non-profit organization plan. This is so they can plan to find out the state and condition of the non-pocket organization in the coming years.
Analyzing the Financial Health of Non-profit Organization
It is essential to analyze the financial health of the non-profit organization; a practice that should never be avoided. It holds a lot of importance to review the budget and then compare it with the actual performance of the non-profit organization. Only then, variances can be tracked and assessed.
During this process, you will find out if you, as a non-profit organization, are planning and executing as expected during the Year. This will give you an idea of whether your expectations and assumptions are being met. Should anything change, a forecast during the year can then be made to tackle the new development.
How Different Are They from For Profit Organizations Budgets?
There are multiple clear and significant differences between the budget of a profit and a non-profit organization. The mission of a non-profit organization is to bring positive change in the world and has a good purpose. However, if you are an entrepreneur, the same is not your goal because the profit organization is to earn profit and make as much money as possible.
The non-profit organization works on a completely different format and Framework, which is an entirely different organization. That is where the differences between the budgeting and the accounting of both organizations are. So, without any further wait, let’s look at the difference between a profit and a non-profit organization below.
1. Funding Sources
A for profit organization will normally receive its funds from the owner(s) or perhaps loans acquired. If the company is strong enough, it can acquire capital from the market. Sources of funds for the nonprofit, however, vary. It can be through donations, governmental grants, private grants, fundraising events, etc.
Having several sources can add a layer of complication to the budgeting process as it requires building assumptions across all potential sources. Some grants, whether governmental or private, can be restricted funding. Which means the funds can only be used for certain expenses or perhaps in certain times. Now another layer of complication is added since the budget must accommodate for such restrictions. This type of restrictions is normally not present with the for-profit organizations.
Therefore, understanding the funding sources and the grants terms are key to developing a comprehensive realistic budget.
2. Differences in Income and Expenses
This is the second main difference when discussing budgeting differences between a profit and a non-profit organization. For profit organization keep track of their expenses and income in a profit & loss format of a statement. It’s in this statement that one can see the result of the operation and whether the entity is profitable or non-profitable regardless of types of services or products it offers.
A nonprofit, however, will need to track all activities by source of funding, i.e. donations, private grants, etc.… depending on whether the sources are restricted or non-restricted. Understanding the differences between the profit and loss statement and the statement of activities is key to developing a comprehensive budget.
There are many different types of donations, and they are restricted on how they will be utilized, and that is very likely to be a self-contained budget for a non-profit organization. There are specific rules and regulations on where and how a particular grant, or a donation will be used, and for which purpose it will be used in an organization that is not for profit.
When Should They Be Prepared?
First, you must determine the timeline and set a target date for approval from the board of directors of the non-profit organization. Then the budget for the non-profit organization is prepared, reviewed and approved. The budgeting process normally starts three months prior to the end of the fiscal year for the nonprofit. Once the goals / programs for the coming year have been determined, the budgeting starts. Therefore, it’s a prerequisite to understand the strategic direction and programs to be the focus for the coming year. It is also essential to understand the current financial situation of the non-profit organization so that you can make a realistic and achievable budget.
Who prepares the budget within the organization varies depending on the structure and size of the non-profit organization. For some, the executive director drives the process, for others, a special team is designated, while for others, it’s the treasurer who initiates the process. It’s not of any consequence who initiates the process if it gets approved by the board in a timely manner.
Once the budget is presented to the board, discussed, and approved, tracking the budget becomes essential to ensure the effective implantation. Reviewing status prior to developing the budget can help in ensuring that the budget is realistic and achievable. Once the budget is agreed upon, the process will come in which they will sign the roles and responsibilities of each team member working in the organization.
What Do They Include?
It doesn’t matter if you are making a budget for a non-profit organization by yourself; if you are working with a professional accountant, there are some steps to ensure you will complete them. Everything will fall according to the expected revenue, and then you will be able to manage the expenses of the non-profit organization properly. There are two primary components of a non-profit organization’s budget. Let’s have a look at both of them below.
1. Funds of The Non-Profit Organization
First, you need to budget for the funding side and separate it by source of funding for the non-profit organization. This will help you properly advocate the resources using past data. Your development team will help you in this regard so that they can understand and predict the data for the future as well. This will give you an idea about how much money you will raise from every razing source.
The first method is known as the discount method, and in this method, the team will identify and analyze the amount of money you expect to receive from every Source. After that, you will multiply that amount by the probability percentage. The percentage applied is at the level of each source and the result of applying the percentage is what’s added to the budget.
The following method is known as the cutoff method. When you are using this method, it will analyze the total amount you expect from the all-fund sources. After that, you will multiply this amount with the probability estimation.
For getting an estimate and calculating it using any method, it is essential to contact a professional non-profit accountant because they will help you and guide you in making the right decisions for forecasting. They will tell you which method should be used for the budget according to the financial position of your non-profit organization.
It’s important to use a probability percentage vs the 100% that you will receive the funds to ensure that you’re not over budgeting your funds and therefore do not fall in the trap of budget shortcomings in the future. Tracking the budget throughout the year and developing forecasting as and when needed will help ensure that you are on track and that you are accommodating any un-forecasted events and uncertainties.
2. Expense Budget
The second component of the non-profit budget is the expense budget. This is the instrument you will utilize when you want to analyze and predict the future cost you will have to face for the non-profit organization. All expenses will need to be included in the budget, whether related to the specific program(s) or the general and administrative costs. The target is to ensure that have the flexibility to work with reducing non-essential / increasing essential costs as needed throughout the period of implementing your goals as an organization.
Who Should Approve Them?
Usually, it’s the Board of Directors’ role to approve the budget. The presentation process is initiated by the Treasurer along with the help of the Executive Director. It will only be implemented in the non-profit organization when the board members approve the annual budget in the full board meeting.
Conclusion
Budgets are key to success. Transparency makes the budget realistic and achievable. Having precise goals and knowing the programs needed to achieve the goals is the first step in developing a comprehensive and achievable budget. Making the budget part of the tools you use to run your non-profit can ensure the success of achieving your cause. Afterall, you did create the profit to support the community and be an instrument in promoting the goodness in society. Nothing is more rewarding than seeing how great of an impact you have on society. Use budgets to help you get there. Contact a professional accountant if you need to. The excellent aspect of a non-profit organization’s budget is that it lets you stay transparent with all the board members and the teams working there.
Transparency is the key to creating a successful budget for your non-profit organization. This will implement confidence, and everyone will trust when involved in a specific non-profit organization. Remember, budgets are not written in stone. When unforeseen events happen during the year, you can always utilize the great tool of forecasting to tackle those events and incorporate in the budget. Also, analyzing results against budget throughout the year is key to making sure the budget is not only stored in documents inside PCs or on emails, but also actually a live tool to ensuring success.
