Posts tagged with "cash projection"

Building a Superior Budget

By Jim Simpson, CPA and director, Financial Technologies & Management

A strong budget is an essential element for any nonprofit organization to achieve financial leadership. Superior budgets, though, have written plans about the core activities to include strategic, organizational, and program goals and how they will be financed.

Most financial leaders focus too much time on budget variance analysis and not enough time to anticipating or planning for the future. By anticipating or planning, organizations can focus on what’s upcoming regardless of its budget cycle or fiscal year end. A budget can be complemented with rolling forecasts to better anticipate upcoming financial results.

Budgets also need to include cash flow projections, which maybe outside of the finance departments capacity or capabilities. Financial leaders must have a direct role in developing useful cash flow projections and assumptions with frequent, detailed analysis.

Any cash flow shortage needs to be further evaluated to determine if it is just a timing difference or an actual cash deficit. Shortfalls created by deficits need to be solved by budget adjustments or strategic choices to absorb a shortfall. An organization can determine timing or actual deficits by reviewing the budget to see if it had planned for or not.

Financial sustainability can only be achieved with a well-prepared and continuously monitored budget. Conversely, a poorly developed budget can diminish mission focused activities opportunities and threaten long-term success.

Typically, the budgeting process should begin three months before the end of the fiscal year to ensure the budget is approved before the start of the fiscal year. It is important that each of the following budget process best practices is used to develop the budget.

 Under current financial status, including review income and expenses, compared to existing budget, forecast remainder of year, then analyze to understand variances.

 Establish a timeline that allows each step to have time for review, discussion and revisions.

 Set up goals to determine organizational and program goals and desired financial outcomes.

 Agree on budget approach to include budget team’s roles and responsibilities along with authority.

 Draft expense budget to attain strategic, organizational and program goals. It is important to break expenses into variable expenses, fixed expenses, incremental expenses, indirect and in-kind expenses.

 Develop draft income budget to identify expected income from funding sources, including any new activities or discontinued activities.

 Review draft budget to ensure it meets organizational and program goals. Distribute draft budget to the budget team to develop consensus and collect recommendations. Modify budget with budget team input to ensure everyone understands and approves the revised draft budget.

 Finance Committee does the deep dive and reviews draft budgets.  The Full Board adopts the budget recommended by the Finance Committee.

 After presentation of the budget to the board, committee and internal stakeholders, approve proposed budget. The proposed budget may need to be revised, so include this possibility in your timeline.

 Implement budget to communicate budget, assign management responsibilities, implement in accounting system, monitor and respond to changes to the budget. It is important that you document budget decisions including writing down all budget assumptions.

 A budget many need to be broken out for donors without restrictions and with restrictions to insure there are sufficient resources to actually fulfill the donor restrictions

 A budget should add a contingency or cushion to take into consideration the unknown.  The less predictable the budget, the more contingency you may have.  5% of non-personnel costs is typical and may increase if funding or costs are not predictable.

 Document budget decisions including writing down all budget assumptions

 Evaluate the financial viability of new, expanded, or discontinued programs.

 A budget should be implemented with monthly distributions to anticipate the changes to monthly income and expenses.

 Take a strategic approach to your budget, which might include a multi-year financial plan.

 A budget is a living document and narrative that tells the nonprofit’s story using numbers.

 Sometimes a zero-based budget approach can help you to understand a budget from the ground up and provide a fresh perspective and generate new possibilities.

There are various budgeting approaches you should take to include incremental, revenue driven, zero based, activity based, and performanced based.

Most organizations take either a top down or bottom up approach for budgeting.   We have found that a bottom up approach creates a better budget.

It is important that we deal with why budgeting fails which includes an improperly prepared budget which leads to no accountability or ownership which leads to an ineffective budget.

It is important to identify budget deficits as either timing or permanent deficits and respond to take action to minimize the financial impact.

You will go a long way towards building a superior budget by implementing these budget process best practices.

Jim Simpson, CPA and director of Financial Technologies & Management, is a nonprofit financial leader and trainer, CFO, controller, forensic consultant and software advisor, including Abila MIP Fund Accounting since 1999. He has served CFO, controller and software advisor for over 25 years to over 350 nonprofit organizations.

Contact Financial Technologies & Management to see how we can help your nonprofit with accounting solutions. You can schedule an appointment directly from the website at WWW.FTMLLC.COM, email info@ftmllc.com or phone at 317-819-0780.