Financial leaders know the annual budget is critical for understanding where your nonprofit organization is going and how you’ll get there. A poorly developed budget can diminish opportunities and threaten your success. How can you stay on top of the nonprofit budget process? A great place to start is by asking the right questions.
Should Our Budget Balance?
This is a key question for ensuring your organization withstands challenges. Though conventional wisdom states you should maintain a balanced budget, there are varying situations and scenarios where you won’t, including a:
- Surplus budget – This budget type drives an increase in reserve funds, generating more income than expenses. Why? Your organization can pay down debt, ease cash flows, or improve net assets. Just be sure your surplus budget is realistic with a feasible plan in place for how you will manage reserves.
- Deficit budget – This works when you have a large reserve of funds and seek to spend or invest to benefit your organization. It’s appropriate to use these funds to expand services, invest in new programs, or make one-time purchases that will lead your organization to have more expenses than income for that year. Be sure you plan a deficit budget well and have a communication plan, so the deficit is not misinterpreted as unplanned or unintentional.
- Break-even budget – This budget-type may not allow you to accumulate reserve funds or invest in your future but can provide an adequate foundation to deliver your mission. It will traditionally outline higher expenses than revenue, requiring you to find ways to boost income and cut costs. With this kind of budget, projections and programs need to be carefully planned out to ensure your organization does not sacrifice mission delivery.
No matter which approach you take, our nonprofit fund accounting software can help you balance your budget by keeping track of grant and donor funding, various expenses, and more financial data.
Cash or Accrual?
Which method works best for your organization? Let’s break down the types:
- Cash – This method focuses on the simple inflow and outflow of cash. Your organization earns revenue at the point a deposit is made and incurs an expense at the point a check is cut.
- Accrual – Using this method, your organization will recognize revenues and expenses at the time they are incurred.
- Modified accrual – This is a hybrid approach that combines the cash and accrual methods by allowing you to recognize revenue at the time it becomes available and expenses when they’re incurred.
Specific requirements and needs will help you determine the appropriate budgeting method for your organization. There are numerous factors to consider to help you determine the best method, including external requirements, cash flow position, and internal skill sets.
You’ll also need to weigh the amount and variety of your funding, the size of your organization, and your number of payables and receivables. Whatever method you choose should be the right fit for your nonprofit and communicated to all internal financial stakeholders.
Have We Identified a Process for Budget Planning?
Following a budget process is crucial to keeping everyone committed to your budget. Here are some key process practices:
- Review financial performance
- Prepare for planning
- Establish a timeline
- Set goals
- Determine costs
- Set project income and forecast flows
- Draft a budget
- Review and receive your draft budget
- Approve the budget
- Implement the budget
You’re probably nodding along at this point, but there’s more to consider. To help you, we’ve developed several budget guides, including Nonprofit Budget Checkup, a webinar that lists all the best practices and insights for developing an efficient and effective nonprofit budget. Good luck and happy budget building!