One of the critical elements of sound financial management practices is having an annual operating budget. Your operating budget could be your power tool, your road map for what you are set to accomplish within the next 12 months. Having your staff involved in developing the budget and your Board approving the plans before the beginning of the fiscal year creates a unifying vision for the year ahead.
If you have your long-term strategic plan in place, this is a great time to review it and plan your next 12 months to support it.
Here's how you can craft your operating budget to work as a "power tool" for your organization:
Process for Crafting an Operating Budget
⚙️ #1 Start by reviewing your strategic plan and get a clear "big picture," then select the steps to accomplish in the next fiscal year to get you closer to it.
⚙️ #2 Start with the program work plan for the year, get the input from the program managers on the desired program goals and the budget to support it
⚙️ #3 Work with the development director to build the fundraising plan for the year to cover program and overhead costs
⚙️ #4 Work with your CFO to bring all data together and get into the nitty-gritty detail.
To systemize the budgeting process, create a budget template and stick to it. Educate your team on how to use it; by year 2, the team will be familiar and comfortable with the process. There are various tools and templates available. Wallace Foundation shares an excellent presentation on the process and provides a Budget template created by BDO.
Key budget elements:
Personnel costs- is usually the most significant expense on the budget. Take your time to outline staff positions by program and funding source.
Program costs - determine your direct program costs. Are they driven by the number of clients your organization serves or the number of program staff?
Overhead costs - know the difference between your administrative and shared costs; identify your shared costs pool and the methods you would use to allocate them to the programs.
Revenue - identify your revenue sources by program and their probability.
Memo - Add a written note summarizing the plans for next year and changes from the current year. Your Board will appreciate it, and so will your team. This would ensure that everyone reads the numbers the same way and answers the questions ahead of time.
Budget Review Process
Your CFO and Executive Director are generally the leadership that oversees the drafting of the budget. They work together to complete this process to this point. Once you have a solid draft, it will flow through the review process:
⚙️#7 Have your finance committee review the budget draft in detail and recommend it to the Board for approval
⚙️#8 Have the board vote on it before the beginning of the year. This ensures everyone is on the same page and agrees with the budget and plan for the year before it starts.
Expect some back-and-forth conversation about the budget and concerns about any figures. An open and proactive dialogue is a good thing. We want to ensure the Board is engaged in the process, is clear with the direction, and is supportive of the plans for the year. Use the feedback received to improve the budget.
Budgeting could be a lengthy process; plan and give yourself at least 8-10 weeks before the end of the year to tackle it. Once everyone approves, you've got your power tool - your road map for the year!
Using Your Operating Budget
Program managers and the Executive Director should review the operating budget every month. The Board of Directors performs their review during the Board meetings, which typically are less frequent (bi-monthly, quarterly, or bi-annually).
Using your operating budget wisely is essential to sticking within your financial means and valuing projects over time. That's why it needs to be something routinely reviewed. To do this, consider these steps:
Review the budget compared to actual reports. Do this regularly to ensure they are on par. If not, investigate the significant variances to ensure you are not off significantly going forward.
Check your balance sheet to ensure it is up to date.
Check your year-end forecast. Is it where you expect it to be? If not, find out why.
Take a closer look at your cash flow projection. Is the organization in a good place for the time of the year?
Use your operating budget as a guide to making decisions. Do you have enough resources to engage in a new program or project? Can you add a new staff position? How much is available for pay increases to your staff? These and similar questions could be easily answered with your operating budget.
Consider doing a mid-year budget revision if you see a significant deviation from your original plan. Did you receive an additional grant that allows adding new staff positions? Was your annual fundraising event not as successful as you initially projected? These changes would prompt us to re-evaluate the current budget and amend it accordingly. The goal is to ensure you are always aware of your financial health.
Rely on a Trusted Accountant
There is significant importance to having a budget for your nonprofit. It guides your spending and decision-making. Build your power tool for what you are set to accomplish that inspires your team!
Katya Koteff, CPA, is the principal and founder of Koteff Accounting Group and specializes in working with nonprofits and socially-responsible businesses. Katya's work is grounded in building long-term trusted relationships with her clients through mutual respect and open and proactive communication.
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