Budgeting Best Practices
Making Your Budget the Backbone of Your Nonprofit - Part 2
Budgeting Best Practices
With the goal of preparing a budget that can function both as a high-level discussion tool and a detailed map for the organization, there are several approaches to consider. As we explore best practices in budgeting, we’ll be using a case study to illustrate real-life numbers and scenarios: Help for Homeless Youth (HHY).
HHY has a $675,000 budget that pays the salaries of eight full-time personnel in addition to program supplies, rent, utilities, and youth stipends. Leadership raises funds from government, foundation, and corporate sources, in addition to hosting a small annual fundraising event. Below is a budget that the executive director of HHY, Jordan Johnson, submitted to NFF for review.
HHY Budget FY 2018
Here are some helpful tips that Jordan employed (and you can, too):
- Set up your budget in its own Excel spreadsheet. For a simple budget, you will most likely use one tab.
- Make sure to include the following on one page/tab:
- Revenue (located at the top), captured in high-level categories such as earned revenue, foundation grants, government contracts, corporate grants, special event income, individual and board donations (see graphic below). Further detail can be incorporated on a separate tab, or on the same tab by using the Group-and-Outline function in Excel (more on this below).
- Expenses (located under revenue). The reason I recommend this logic and flow (revenue followed by expenses) is that it’s helpful for your budget template to easily align with other financial presentations (e.g., year-to-date, past operating results prepared by a software accounting system, or your audits). Notice below that expenses are listed in the high-level categories of personnel, contractors, occupancy, and support expenses (which include all other program and operating expenses). Personnel is very important to segregate as it usually comprises anywhere from 60% to 90% of an organization’s budget. In HHY’s case, it represents 62%.
- Operating Surplus / Deficit line. Make sure to include a formula subtracting expenses from revenue, which is a simple way to save board members from having to do the calculation in their heads (even if the calculation points to a breakeven budget). This seems obvious, but on more than one occasion I have not seen the surplus/deficit calculation presented. Refer to line 95 in the graphic above where Jordan includes the operating surplus/deficit.
- This year’s projected financial results (e.g., revenue, expenses, surplus/deficit) included in a separate column for comparison purposes. This should represent 12-month results, and as discussed in our last blog, where you think you will most likely end the year. This column is labeled Forecast FY 2017.
- Variance. The variance column represents the value of the difference between the budget and the forecast figures. For example, revenue from government sources is showing a variance of negative $5,000, meaning that HHY expects to receive $5,000 less in the next year as compared to the current, 2017-year forecast. Likewise, for each of the expense items listed above, a positive variance is one in which the budgeted 2018 costs exceed the 2017 forecast expense.
- Notes column. In the example below, you will see notes and assumptions for some of the categories of the budget to the right of the numbers. It is very important to keep good notes not only to keep track of your thinking, but also to be able to answer board questions as they arise.
Notice what is not included:
- The beginning and ending years’ cash balance. If you do list it, it should be only for reference purposes. The budget should just represent the financial activity of the next 12 months.
- Carryover. You only want to include revenue that is intended to cover next fiscal year’s expenses. Nothing should be carried over from the previous year to make this year’s budget balance, UNLESS it is a contribution or donation that was restricted in the previous fiscal year, and its restrictions are intended to be satisfied in this budgeted fiscal year. If that is the case, you will want to label it “Net assets released from restrictions” (see line 23 above). We will discuss this in our next blog, Budgeting for Restrictions.
How many budget templates should I have? A detailed one for staff, and more general one for board?
Instead of creating two or more separate budgets, the Group-and-Outline function in Excel helps you “roll up” the budget into a high-level summary format for board discussions, or reveal more detail for staff and finance committee discussions, by organizing rows and/or columns into an outline. You’ll find this function in the “Data” tab. Below is a brief video demonstrating how you can use this feature.
The following may be helpful to include on different tabs and will depend on what is critical to track given your business model. We won’t be going into detail on all the topics that follow in this blog series, but NFF consultants can certainly help you strategically think through any of these different budgeting ideas (click here to learn more).
- Revenue with donor restrictions tab. For organizations that have many grants with donor restrictions (particularly multi-year grants), you will want to list the grants, time restrictions, amounts, probability, and notes on a separate tab (I will cover some budgeting tips for revenue with restrictions in our next blog).
- Fundraising/development tab. For those organizations that have many different funders, you should consider tracking and monitoring your development activities in a separate tab, including the probability of receipt. (Stay tuned for more on the art of predicting contributed revenue in a future blog.)
- Core versus aspirational budgeting. Sometimes we want to expand programming in the coming year, but do not have funds to pay for the expansion. Or, we might get an out-of-the ordinary gift that we know won’t be repeated in future years. One way to incorporate these deviations from our core budget is by segregating the one-time revenue increase and/or the new programming expense(s) from the rest of your budget. You could insert a separate column (or create a new tab) labeled “Enhanced 2017 Budget” to make it easy to see the core budget versus your aspirational thinking.
- Personnel tab. This category of expenses is very important, and it’s often critical for some leaders to more intentionally track each position, including full-time, part-time, or contract personnel along with benefit assumptions.
- Program economics. Understanding the economics of individual programs can help you better understand how each contributes to your overall business model.
- Contingency line item. Surprises happen, and you should be prepared to handle them. One way is to insert a contingency line into the expense part of the budget. While this helps in planning for and mitigating potential risk, please note that some funders may object to this line item.
What about revenue that’s restricted?
Did Jordan capture her two-year $240,000 grant from the Sunshine Foundation in the best way? Great catch! We’ll discuss how to budget for restrictions in our next blog.
Next up: Budgeting for Restrictions