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Planning and Writing an Annual Budget

  

Main Section

 Contributed by Phil Rabinowitz Edited by Bill Berkowitz & Tim Brownlee

What are the elements of an annual budget?

Why should you prepare an annual budget?

Some practical considerations

Planning and gathering information to create a budget

Putting it all together: Creating and working with a budget document



Most families, especially those that don't have a lot of extra money, operate on a budget. They're constantly comparing money in with money out, so they won't overspend their income. They know approximately how much they need to spend for the basics -- food, clothing, shelter, utilities, medical expenses, transportation, etc. They know from experience how much of a cushion they need for emergencies or other unexpected expenses -- a brake job, a leaky pipe, a family funeral -- and how much they want to put away for retirement or for college.

After all those necessities are covered, if there's any income left over, the family might use it for entertainment or vacations, or buying something they want, but don't necessarily need, like a new stereo or a camcorder. If they badly want something they can't afford -- a new house, perhaps -- one or more family members might take another job to increase their income, and they might cut back on or eliminate spending on things they don't absolutely need. By knowing how their spending compares to their income, and making adjustments where they need to, the family maintains control over its finances.

Organizations also need to maintain control over their finances. Whether your organization spends a thousand dollars or a million dollars a year, you want to use it wisely and make it go as far as possible. In addition, most funders will hold you accountable for how you've spent what they gave you, and you need to be able to show them exactly what you've done with their money. And, like a family, you certainly don't want to go into debt unexpectedly, or find yourself without the money to pay your bills. For all these reasons, it's important to create and maintain an accurate and up-to-date annual budget for your organization.


What are the elements of an annual budget?


How specific and complex the actual budget document needs to be depends on how large the budget is, how many funders you have and what their requirements are, how many different programs or activities you're using the money for, etc. At some level, however, your budget, like a family's, will need to include the following:

  • Projected expenses. The amount of money you expect to spend in the coming fiscal year, broken down into the categories you expect to spend it in -- salaries, office expenses, etc.

Fiscal Year: This term means "financial year," and is the calendar you use to figure your yearly budget, and which determines when you file tax forms, get audited, and close your books. There are many different fiscal years you can use. Businesses often use the calendar year -- January 1 to December 31. The federal government's fiscal year runs from October 1 to September 30. State governments -- and therefore state agencies and many community-based and non-profit organizations that receive state funding -- usually use July 1 to June 30. Most organizations adopt a fiscal year that fits with that of their major funders.

You'll want to prepare your budget specifically to cover your fiscal year, and to have it ready before the fiscal year begins. In many organizations, the Board of Directors needs to approve a budget before the beginning of the fiscal year in order for the organization to operate.

  • Projected income. The amount of money you know or can reasonably expect to take in for the coming fiscal year, broken down by sources -- i.e. the amount you expect from each funding source, including not only grants and contracts, but also your own fundraising efforts, memberships, and sales of goods or services.
  • The interaction of expenses and income. What gets funded from which sources? In many cases, this is a condition of the funding: a funder agrees to provide money for a specific position, for instance, or for particular activities or items. If funding comes with restrictions, it's important to build those restrictions into your budget, so that you can make sure to spend the money as you've told the funder you would.
  • Adjustments to reflect reality as the year goes on. As you'll see below, many of the numbers you put into your first try at a budget are estimates, based on past experience or on guesses. As the year progresses, those estimates need to be adjusted to be as accurate as possible so that you can keep track of what's really happening to your money.


Why should you prepare an annual budget?


An accurate and rational budget is an indispensable tool for any organization. Some particular advantages of budgeting well:

  1. It sharpens your understanding of your goals. Budgeting makes it clearer exactly what's necessary and desirable to spend your money on.

  2. It gives you the real picture. By accurately showing you what you can afford, where the gaps in funding are, etc., your budget allows you to plan beforehand to meet needs, and to decide what you're actually able to do in a given year. At the same time, it discourages you from raising false hopes or making promises you can't keep. Your budget gives you a spending plan to follow, so you can be sure not to spend more than you have.

  3. It encourages effective ways of dealing with money issues. By showing you what you can't afford with known income, a budget can motivate you to be creative -- and successful -- in seeking out other sources of funding.

  4. It fills  the need for  required information. The completed budget provides a necessary element of funding proposals and reports to funders and the community.

  5. It facilitates  discussion of the financial  realities of the organization. Your budget enables you to communicate about financial priorities and needs more clearly with both the staff of the organization and the outside world.

  6. It helps you avoid surprises and maintain fiscal  control. Planning of this sort in general is absolutely necessary to run an organization. The last thing you want is a negative financial surprise. With a realistic budget, you greatly reduce the chances of getting one. Ultimately, an up-to-date, accurate budget makes your life easier by helping you to maintain control over the finances of the organization.


Some practical considerations


The amount of time and effort you spend on your budget should bear some relation to the size of that budget. If your annual budget is $1,000.00, your budgeting shouldn't take a lot of time, although it's still important to balance your income and your spending, and to try to get the most out of your money. If your budget is $100,000.00 or more, it's worth a good bit of time and effort to make sure that you know exactly how you'll manage it. At that level, you may have several different sources of funding, and you'll have to account for your spending carefully. If your budget approaches a million dollars, you'll almost undoubtedly need an in-house accountant or Chief Financial Officer (CFO) to oversee it. At that level, finances become complex enough that it's important to get a professional overview.

It's important to note here that not everyone involved in grass roots or community-based organizations has the skills or desire to create and manage a budget single-handed. Fortunately, there's help available, both within the organization (by hiring a bookkeeper, accountant, or CFO, if that's possible) and elsewhere. Often, Board members or other community volunteers with financial expertise can be found who'll donate some of that expertise to the organization. There are organizations, like SCORE (Service Corps of Retired Executives), that exist to assist those who need it with just such things as budgeting. Local universities or government agencies may maintain offices that help small businesses and non-profits with financial planning. The possibility of an accounting or similar position shared with or loaned by another organization may also exist (See Chapter 46, Section 6: Sharing Positions and Other Resources).

The rest of this section will offer a step-by-step guide to

  • Planning for your budget
  • Gathering the information you need in order to create your budget
  • Putting together a budget document
  • Analyzing and adjusting the budget
  • Using the budget as a working tool.


Planning and gathering information to create a budget


The preliminaries: Determine what you need to spend money on in the next fiscal year.

This might sound like a no-brainer, but in fact many organizations embark on the budget process without having carefully worked out what their priorities are or what makes the most sense for the organization at its particular stage of development. Actually figuring out what you should be spending your money on involves an organization-wide planning process (See Chapter 8: Developing a Strategic Plan; and Chapter 42, Sections 1: Developing a Plan for Financial Sustainability, and 2, Creating a Business Plan.)

What kinds and levels of programs or activities will you try to run in the coming fiscal year? Elements to consider will vary from organization to organization, but the most important usually are:

  • What are the activities or programs that will do the most to advance your cause and mission, and that you think you can carry out with the income and resources you know you have or can foresee?
  • How many staff positions will it take to run those activities or programs well?
  • How much, how (hourly wages, salary, consultant fees, benefits), and from what sources will those staff members be compensated?
  • What else will be needed to run the organization and its activities -- space, supplies, equipment, phone and utilities, insurance, transportation, etc.?

Once you know what you need, you can proceed to the next step: figuring out how much it will all cost.


What will it all cost? Estimating expenses (6 Steps)

Step 1: Develop ways of estimating your expenses.

In order to begin creating a budget, you'll need to estimate your expenses for the coming fiscal year. In some cases -- yearly rent, or salaries, for instance -- you'll probably have real figures for what these expenses will be. In other cases -- telephone and utilities, e.g. -- you'll have to guess, based on last year's figures (if there was a last year for your organization) or on an estimate of an average monthly cost.

Phone and utility companies will often assist you by coming up with an estimate based on your expected use. For supplies and equipment, the best method is to price items at a place where you expect to be buying them, and then to create a budget item based on what you think you'll need. In these and other instances, the experience and advice of other community based organizations can also be helpful.

Be sure to add in some money in a "miscellaneous" category, in order to be prepared for the unexpected. There are always expenses you don't anticipate, and it is part of conservative estimation to make allowances for them.

Conservative estimation: When preparing a budget, try to be as accurate as possible so you can avoid unpleasant surprises. One way to do this is to always use actual figures if you have them. When you don't have them, another safe technique is to estimate conservatively for both expenses and income.

When you estimate expenses, guess high -- take your highest monthly phone bill and multiply by 12, for instance, rather than taking an average -- so that if you're wrong, you'll probably have money left over, rather than being caught short. By the same token, when you're estimating income, guess low -- the smallest number realistically possible -- so that if you're surprised, it will be because you have more money than you expected. Estimating conservatively when you plan your budget will make it more likely that you stay within it over the course of the year.

Step 2: List the estimated yearly expense totals of the absolute necessities of the organization. These are the things you know you're already obligated for, and without which the organization couldn't function at all. For most organizations, they include, but aren't necessarily limited to:

  • Salaries or wages for all employees, listed separately by position.
  • Fringe benefits for all employees, also broken out by position. Remember that even if you have no formal fringe benefits, you still have to pay part of the Social Security and Medicare taxes, as well as Workers' Compensation and Unemployment Insurance, for any regular employees (people who work a fixed schedule). These costs can be considerable, amounting to 12 to 15% added on to your total payroll.
  • Rent and/or mortgage payments for the organization's space.
  • Utilities (heat, electricity, gas, water) if you have to pay for them.
  • Phone service.
  • Internet server costs.
  • Insurance (liability, fire and theft, etc.).

Step 3: List the estimated expenses for things you'll need to actually conduct the activities of the organization. Unlike the previous list, most items here will probably be tangible -- actual stuff

  • Program and office supplies: pencils, paper, software, educational material, syringes, bullhorns, post-it-notes -- whatever you need to do what you do over the course of a year.
  • Program and office equipment. Generally, equipment is defined as things that last for a period of years (usually more than three) and cost more than a set amount. Funders may set that amount high enough ($5,000 or more) so that computers and even copiers may fall into the "materials and supplies" category. Wherever you classify computers and peripherals, copiers, faxes, etc., be sure to figure in the annual estimated costs of repairs or service contracts in addition to purchase or lease costs.

For budgeting purposes, it may be useful to separate program supplies and equipment from office supplies and equipment. In the case of state and federal funding, at least some office expenses are often considered "administrative", and funding for administrative expenses may be limited, sometimes to as little as 5% of your budget.

Step 4: List estimated expenses for anything else the organization is obligated to pay or can't do without.

  • Loan payments.
  • Consultant services. These may include an annual audit, accounting or bookkeeping services, program people who are paid as consultants, payments to other organizations for specific services, as well as individual consultants who are hired to advise or provide services to the organization.

Most non-profit organizations are required, either by funders or by the IRS, to undergo an audit every year. This means that a CPA (Certified Public Accountant) must check the organization's financial records to make sure they are accurate, and work with the organization to correct any errors or solve problems. If he finds nothing illegal or seriously wrong, the CPA then prepares financial statements using the organization's books, and certifies that the organization follows acceptable accounting practices and that its financial records are in order.

The larger an organization's budget, the more complicated an audit is likely to be, the more time it is likely to take, and the more it is likely to cost. An audit of a $100,000 budget might cost $2,000 to $4,000, for instance; that of a $1 million budget might cost $15,000. (See Chapter 43, Sections 5: Creating a Financial and Audit Committee, and 3: Handling Accounting.)

  • Printing and copying, if not done within the organization.
  • Transportation: travel expense for staff, participants, and/or volunteers; and vehicle upkeep and expenses for any organization-owned vehicles.
  • Postage and other mailing expenses.

Now that you've gathered your necessary expenses, you can take a look at your wish list.

Step 5: List estimated expenses for those things which you don't yet know you can afford, but would like to do or have in the coming fiscal year. These might include staff positions, new programs (including staff, supplies, space... whatever is necessary to run them), equipment, etc. Create this list as you did the others -- break it down by categories, and try to be as accurate as possible in your estimates.

Step 6: Add up all the expense items you have listed. This total is what you would like to spend to run your organization. In other words, it's your projected expense for the coming fiscal year.


Where are we going to get all that money? Estimating income (9 Steps)

Once you've figured out what you want to spend, it's time to find out whether you can afford to spend it or not. The rules for estimating here apply in the same way as for expenses. You can use last year's figures, if you have them, as a baseline. Information from other organizations can be helpful here, as well as whatever you can find out from funders about your chances. Remember to estimate conservatively, rather than being overly optimistic, and laying yourself open to disappointment and worse.

Step 1: List all actual figures or estimates of amounts you can expect from your known funding  sources -- sources that have already promised you money for  the coming year, or that have regularly funded you in the past. These may include federal, state or local government agencies; private and community foundations; United Way; religious organizations; corporations or other private entities; and individual "angels" who give large sums.

Step 2: If your organization does community or other fundraising, estimate the amount you'll raise in the next fiscal year. Fundraising efforts might include community events (a raffle, a bowl-a-thon), more ambitious events (a benefit concert by a world-class performer), media advertising, or phone or mail solicitation.

Step 3: If you charge fees  or sell services, estimate the amount you'll take in from these activities.

Step 4: If you solicit members who pay yearly dues or fees,  estimate the amount that membership will yield.

Step 5: If you sell items -- pins, T-shirts, books, blood pressure cuffs -- estimate what these sales will bring in.

Step 6: If you sublet or rent space to others, record the estimate of what this will bring in.

Step 7: If you have any investments, endowment income, annuities, or interest income (e.g., from  a certificate of deposit, or from a Money Market or checking account), estimate what you'll realize from these.

Step 8: List and estimate the amounts from any other sources that are expected to bring in some income in the coming fiscal year.

Step 9: Add up all the income items you have listed. This total is the money you have to work with, your projected income for the next fiscal year.


Putting it all together: Creating and working with a budget document


With numbers for projected expenses and projected income, you've done the groundwork -- and some of the hardest work -- of preparing an annual budget. Now it's time to use those numbers to make sense of your organization's finances for the next fiscal year.


Analyzing and adjusting the budget (5 Steps)

Now that you have all your numbers together, you can use them to come up with a budget that makes sense for your organization. What you have so far is only the raw material: to create a budget, you have to use it to decide what you can actually afford to spend, and what you will spend it on.

Step 1: Lay out your figures in a useful format. If your budget is going to be useful, it has to be organized in such a way that it can tell you exactly how much you have available to spend in each expense category. Merely comparing your projected expense to your projected income will not necessarily tell you whether you have enough money to do everything you want to, since some of that income may come with restrictions from funders as to how it can be spent. For example, you need to assign any restricted money to the categories to which it's restricted.

The easiest way to do this is by using a grid, usually called a spreadsheet. In its simplest terms, a spreadsheet will have a list of funding sources along its top edge and a list of expense categories running down its left-hand edge, so that each vertical column represents a funding source, and each horizontal row represents an expense category. Where each column and row meet (this meeting place is called a cell), there should be a number representing the amount of money from that particular funding source (the column) that goes to that particular expense category (the row). A simple spreadsheet for a small organization might look like this:

Spreadsheet: United Consolidated Metropolitan Health Agency (UCMHA)

 

Dept. of Public Health

United Way

Membership

Dept. of Welfare

Totals

Salaries

15,000

2,500

2,500

21,000

41,000

Fringe

3,000

500

500

4,200

8,200

Supplies

300

200

0

500

1,000

Equipment

1,500

1,500

0

0

3,000

Phone

400

150

0

600

1,150

Utilities

500

200

0

500

1,200

Insurance

800

200

0

400

1,400

Rent

4,000

500

0

3,000

7,500

Totals

25,500

5,750

3,000

30,200

64,450

A spreadsheet format allows you to assign restricted funds to the proper categories, so that you can see how much money is actually available to you for any given expense category. In the above example, if the Department of Public Health says that no more than $18,000 of its grant can be spent on salaries and fringe, for instance, then you know that you have to find the rest of the $49,200 total in those categories from other sources. Putting your figures in a form that shows you this information is absolutely necessary if you're going to make accurate decisions about your money.

While you can prepare a spreadsheet perfectly well with pencil and paper, it is infinitely easier and more flexible to use a computer. Software of all types is available, from very simple spreadsheet programs, like that included in Microsoft Works, to accounting programs designed specifically for non-profit organizations. The advantage of a computer spreadsheet is that it is self-adjusting: you can set it up so that when you change figures in cells, the totals change as well. As you'll find when you start working on a budget, this feature saves an enormous amount of time and trouble, and is well worth the effort it takes to learn how to set up and use the software.

Step 2: Compare your total expenses to your total income. If your projected expenses and income are approximately equal (in a budget of many tens of thousands of dollars, a difference of two or three hundred is insignificant and can be easily adjusted), then your budget is balanced. As long as you can make things work with whatever restrictions there are on your funding, you can accomplish what you've planned in the coming year.

If your projected expenses are significantly less than your projected income, congratulations ! You are in the enviable position of having a budget surplus. This circumstance leaves you with the possibility of expanding or improving the organization, or of putting money away for when you need it.

If your projected expenses are significantly greater than your projected income, you have a budget deficit. In this case, you'll either have to find more money or cut expenses in order to run your organization in the coming year.

Step 3: If your budget is balanced... (your income and expenses are approximately equal) you're not necessarily home free. You still need to make sure that you can use your money in the ways you're planning to. Can you put enough money in each of your projected expense categories, given whatever restrictions there are on your funding? If you've filled in the numbers in accordance with your funding restrictions, your spreadsheet should immediately let you know whether you have a problem in this regard. If there is a problem, there are several ways of addressing it.

  • It may be possible to come to an arrangement with the funder that allows you to use the money in the ways that you'd like to, or that allows you more freedom.
  • You may be able to reassign some expenses from one category to another. If you don't have enough money to pay an Assistant Director, for example, it may make sense to make her the coordinator of a particular program, and to pay part of her salary out of the funds allotted to that program.
  • In some cases, it might be necessary to rethink your priorities a bit, so that the money can be spent in accordance with funding restrictions.

It's important to remember, however, that the mission, philosophy, and goals of your organization should drive its funding, and not the other way around. Creating a program simply to make use of available funding is usually a bad idea, unless the program is one you've already planned for, and will clearly fit in with and advance the mission of your organization.

  • In the worst case, you may simply have to act as if you have a deficit budget (See Step 5: If you have a deficit...? below).

Step 4: If you have a surplus... (significantly more income than expenses), and if funding restrictions don't present a problem for you (see Step 3 [18] above), you're in a terrific position. You have a number of choices, and they're all good. Just be sure not to spend your surplus before you have it in hand; it may not show up as cash until the end of the coming fiscal year, and you still have to pay for operation of the organization over that time. If you plan to use it in the coming fiscal year, your estimate of what you're going to spend should be figured into the budget; your final document may be a balanced budget, rather than one that has a surplus, but you'll be getting more than you originally expected.

  • The most conservative course is to try to stick to your budget, and invest or bank the money you have left over at the end of the year. This will give you something to draw on in emergencies, or money you can use in the future for something that the organization really wants or needs to do.
  • "Invest" here doesn't necessarily mean putting money in the stock market, which usually doesn't make sense unless you have a lot of money to play with, and you're willing to stay with it for a long period of time -- ten years or more. Certificates of Deposit, which give high interest rates in return for keeping money in the bank for a set period (generally, you can choose a period of from six months to five years), or Money Market accounts, which give a high interest rate in return for keeping a large balance, are easy ways for an organization to earn interest on its money, while still keeping it available for emergencies.
  • You can use your surplus to improve working conditions within the organization : raise salaries, add a benefit package, etc. It is important to remember that once you've instituted this type of change, you're obligated to maintain it.
  • You can buy items that you haven't been able to afford. Perhaps you're desperate for a new computer system or new furniture. Perhaps there are program materials that you've wanted for a long time. This may be the opportunity you've been waiting for. The advantage of buying equipment or other tangible items is that you'll still have them regardless of whether you have a surplus in future years.
  • You can consider adding positions or starting a whole new program or initiative, perhaps one you've been planning for a long time. As always, you need to be sure that anything you start advances the mission and goals of the organization, and isn't something you're doing just because you have the money to do it. If you're starting a new program, you're also implicitly making a commitment to maintaining it for a period of years, so that it will have enough time to be successful.
  • You can think about a long-term capital investment, like buying a building. You could lock in your rent for the duration of the mortgage (probably 20 years), and you might be able to provide the organization with income as well, by renting part of the building to other organizations.
  • Your surplus may not be large enough to enable your organization to make significant changes on its own, but it may provide the means for you to enter into a collaboration with other organizations to achieve a goal that none could have accomplished alone (See Chapter 46, Section 6: Sharing Positions and Other Resources).

Step 5: If you have a deficit... (significantly more expenses than income), it's obviously the most difficult to deal with of the three possible states of your budget. It's necessary, by the end of the coming fiscal year, to be able to pay for everything you've needed to run and do the work of the organization. If your budget says there isn't enough money to do that, you have some tough choices to make. In many cases, an organization may need to combine several or all of the following possibilities in order to make its budget work. Starting with the easiest, they include:

  • If you have enough money in the bank or in investments from prior years, you can use it to make up the gap in your budget. This is the rainy day that you saved it for.
  • You can try to raise the additional money you need through grantwriting, fundraising efforts and events, increasing your fees for service, etc. If you have a plan for raising money -- a raffle to finance a new copier, say -- it should be listed with your estimated income. But be aware that such a projection isn't "real" money until the financial goal it represents is actually reached.
  • You can explore saving some money by collaborating with another organization to share the costs of services, personnel, or materials and equipment (See Chapter 46, Section 6: Sharing Positions and Other Resources).
  • You can try to cut expenses by reducing some of your costs: use less electricity (if you have air conditioning, set it at 80 F. [27 C.] rather than 68 F. [20 C.], and delay turning it on as long as possible), monitor phone use (some organizations have found that just asking people to log their calls can reduce phone use by 25-50%), reuse old memos as note paper, try to get donations of some items you planned to buy, etc. Can you get a better deal on insurance, or on your Internet Service Provider? Some larger savings -- perhaps many thousand dollars -- could be realized by finding cheaper or donated space (as long as the move doesn't compromise what your organization does.)
  • You can cut expenses by eliminating some things from your budget.

A Guide for Budget Cutting

If you're going to cut your budget, it's a good idea to have a rational system for doing so. Here is a suggested step-by-step process which allows you to look at what is more and less necessary, and to make considered decisions about what you can do without and what you can't.

1. Look first at those items that aren't essential to the running of the organization -- the "estimated expenses for those items that you don't yet know whether you can afford, but would like to do or have in the coming year" category. A program you planned to start this year, but don't absolutely have to; a new copier, when the old one still works; real furniture, as opposed to the tag-sale stuff you've been using -- all of these could be chopped out of the budget without damaging the integrity of the organization.

Would eliminating some or all of these balance your budget? Whether or not the answer to the last question is "yes," you should only retain any of these items if :

a. There's already income to pay for them, or you have a plan for finding it; and/or

b. They won't be purchased or embarked on until the money to pay for them is actually available; and/or

c. It's agreed that they're important enough that the organization will pay for them in any case, and will take the risk that it may have to go into debt or cover expenses in some other way. (There's always the chance that as you look at the budget, the organization will decide that one or more items on this list are necessary after all.) If eliminating some or all of these items doesn't yield enough money to put your budget in balance, you may have to swallow a bigger pill.

2. Can you cut or cut down the amount of physical, tangible items you need to run the program, or cut the cost of services in some way? Can you spend less than you planned on office and/or program supplies, for instance, without compromising the quality of what you do? Can the organization take over cleaning or painting the office, or servicing a vehicle, or stringing office phone lines?

3. Finally, if nothing else will serve to balance the budget, you may have to consider cutting back on whatever it is the organization does, which usually translates to dealing with the positions of paid staff. There are several ways to save money in this area, some less palatable than others.

a. Reduce the hours of one or more staff, if people are on hourly wages. One possibility here is to reduce the work week from 40 to 37.5 hours, or even further.

b. Reduce one or more positions from full to half time. In many organizations, this reduction would eliminate benefits for those affected.

c. Ask staff to pay a larger share of their fringe benefits (if there are fringe benefits).

d. Lay off one or more staff members.

  • You can borrow the money you need, being sure to add the loan payments to your projected expenses and figure them into your revised budget. In general, this isn't a great solution -- it puts you in debt, not a good position to be in, and hangs the albatross of debt payments around your neck over what may be a long period of time -- but sometimes it may be the only way to deal with the situation.


Creating an actual budget document

Once your budget balances or shows a surplus, is as accurate as you can make it with the information you have, and covers everything you and others think you'll need to run the organization, you have the annual budget for your organization for the next fiscal year. While the spreadsheet is probably what you'll use to keep track of your finances, you might also want to put the budget in a form everyone in the organization can understand. Depending upon exactly how much information you want people to have, there are different forms you can use.

1. Probably the simplest budget document is one which lists projected expenses by category and projected income by source, with totals for each. Thus, anyone can see how much you intend to spend, how much you intend to take in, and what the difference is, if any. Referring back to the spreadsheet example above, a simple budget would look like this:

UCMHA Annual Budget for Fiscal 2001 (July 1, 2000 to June 30, 2001)

 

Expenses:

  Salaries
$41,000.00
  Fringe
8,200.00
  Supplies
1,000.00
  Equipment
3,000.00
  Phone
1,150.00
  Utilities
1,200.00
  Insurance
1,400.00
  Rent
7,500.00
   

Total Expenses

$64,450.00
 

Income

  Dept. of Public Health
$25,500.00
  United Way
5,750.00
  Membership
3,000.00
  Dept. of Welfare
30,200.00
 

Total Income

$64,450.00

2. Another possible form would be similar, but would include a budget narrative, explaining how various items were arrived at. The salary item, for instance, might look like this:

Salaries  
Director/Coordinator: 20 hr./wk. x $17.00/hr. x 52 wks
$17,680.00
Health Educator: 30 hr./wk. x $14.95/hr. x 52 wks
23,320.00
Total salaries
41,000.00

Other categories would be handled in the same way, with explanations of what they included and how the money would be spent. Supplies, for example, might be broken out into "office supplies" and "program supplies," with a brief description of what was included in each category (writing materials, software, computer disks, texts, etc.) and how the total amount was arrived at (?$25/participant x 20 participants = $500.00?).

3. A final possibility would be to use the spreadsheet itself as a budget document, for those who wanted to see exactly how the money was to be allocated. Many organizations provide their Boards with both a simple budget and a spreadsheet, so that those Board members who are eager to understand the organization's finances can get a clear picture, while others can simply see whether the budget is in balance, which may be as much as they want to know.


Working with your budget

Once you have an accurate, balanced budget for the next fiscal year, it becomes the basis for your control over the organization's finances during that period. By comparing the budget with your actual spending as the year goes on, you can tell immediately if you're going to have a problem in a particular expense category, and take steps to do something about it.

Most organizations make sure to review their budgets on a regular schedule -- once a month is usually reasonable -- and revise them as much as is necessary to keep them as accurate as possible. If you get a grant you didn't anticipate, or if your spending estimates are off, these things should be figured into the budget, and become part of a new, more accurate budget. (In many organizations, when the budget changes significantly, the Board needs to approve the new budget before it can be acted upon.)

A word about funders and budget changes.

Most public funders -- federal, state, and local government departments and agencies -- and many others require that you submit and stick to a line-item budget, a budget that specifies exactly how much of their money you'll spend in each expense category. If you say you're going to spend $500 on supplies, you're committed to that amount once the funder approves your budget. If you spend significantly more in a particular category, you could be asked to return the money.

Most funders, however, are more than willing to adjust budgets over the course of a year, as organizations realize that they need more or less in particular areas. Some grants allow for adjustments in line-items of up to a certain amount (10 or 20% is common) without any discussion, and most can be adjusted in larger amounts with a funder's permission. Don't be shy about taking advantage of the opportunity to change your budget for a particular grant if you need to. The funder wants you to do a good job, and is almost always willing to be flexible to make that happen.

The budget becomes the basis for financial documents that you might prepare during the course of the year (balance sheets, for instance) which give an up-to-the-minute picture of the financial status of the organization (See Chapter 43, Section 3: Handling Accounting). At any time during the year, the following should be true:

  • The budget should tell you if there are still any gaps in funding, and exactly where they are.
  • It should show you, through projected funding sources and the amounts those sources have so far produced, exactly what you need to do to close those gaps.
  • The budget can tell you whether you're overspending (or underspending) in any expense category, and allow you to transfer money from one category to another, or to adapt in some other way to an unexpected development. In other words, your budget makes it possible to keep careful track of your money, to adjust to changes, and not to overspend.
  • The work you did in developing the budget before the fiscal year started can be used to guide the work of the organization over the course of the fiscal year. If you have unanticipated income or expenses, the organization has already made the decisions about its priorities, and you'll know what to add or cut in order to bring the budget into balance.


To sum up


Devising a budget process that examines the organization's priorities, and using it to produce an accurate, balanced budget for the coming fiscal year will help you keep control of the organization's finances, and will help guide the work of the organization. A rational and accurate budget will allow you to keep good relations with your funders by making it easier for you to give accurate reports and to spend their money as you have promised. It will improve your reputation in the community, by showing you to be a responsible organization that pays its bills on time and keeps careful track of its money. And it will make your life easier and less stressful by giving you clear guidelines about what you can spend and when.



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Glossary

Accounting: The method by which one keeps track of and manages money. There are various accounting systems that an organization can use, but the goals of all of them are to assure accurate records, and to give the organization the ability to know exactly how its money is being spent and how its financial position compares to its budget at any given moment.

Audit: A CPA (Certified Public Accountant) checks the organization's financial records to make sure they are accurate, and works with the organization to correct any errors or solve problems. The CPA then prepares financial statements using the organization's books, and either certifies that the organization follows acceptable accounting practices and that its financial records are in order, or explains any problems with the financial records and suggests corrective measures.

Balanced Budget: Projected expenses and projected income are approximately equal.

Budget Deficit: Projected expenses are significantly greater than projected income.

Budget Surplus: Projected income is significantly greater than projected expenses.

Conservative Estimation: Using the highest reasonable figures when estimating expenses and the lowest reasonable figures when estimating income, so you will be more likely to create a budget that will keep you from overspending.

CPA: Certified Public Accountant. A certified audit, which is what most funders require, must be conducted by a CPA.

Fiscal Year: This term means financial year, and is the calendar which you use to figure your yearly budget (July 1 to June 30, for example) and which determines when you file tax forms, get audited, and close your books.

Fund Accounting: The practice of keeping a separate record of the expenditures for each separate grant or contract administered by an organization. Thus, a grass roots AIDS prevention initiative might keep separate records for funds they receive from the Department of Health, the Department of Social Services, the Department of Welfare, a local community foundation, and the AIDS Action Committee.

Line-Item: An expense category (salaries, telephone, office supplies).

Line-Item Budget: Generally, a budget agreed upon with a funder that specifies how much of the funder's money will be spent on each line-item. It could also refer to any budget that is broken out by line-item.

Projected expenses: The amount of money you expect to spend in the coming fiscal year, broken down into the categories you expect to spend it in -- salaries, office expenses, etc.

Projected income: The amount of money you know or can reasonably expect to take in for the coming fiscal year, broken down by sources -- i.e. the amount you expect from each funding source, including not only grants and contracts, but also your own fundraising efforts, memberships, interest and investment income, and sales of or fees for goods or services.

Spreadsheet: A grid format for setting out a budget in order to see expenses, income, and the ways they interact all in one place. In a budget spreadsheet, each vertical column represents a funding source, and each horizontal row represents an expense category. In the space where a column and row meet (called a cell) a number represents the amount of money from that column's funding source spent on that row's expense category.


Resources


Internet resources

http://www.allianceonline.org/faqs.html
A brief how-to on preparing a budget. The home page of this site (http://www.allianceonline.org) is reasonably useful, and has a section (which can be reached directly at http://www.allianceonline.org/faqs.html) which gives the answers to many frequently asked questions (FAQs) about non-profit finances.

http://www.avagara.com/nonprof/accountability/
A simple budget quiz for nonprofits, scored immediately, to indicate whether they need more controls on their budget. Not very useful, except to give ideas about what kinds of procedures and controls ought to exist in the organization.

http://www.genie.org
The Non-Profit Genie. Links to resources for non-profits -- a good site, although not always easy to navigate.

http://www.idealist.org
Links to services, resources, etc. for non-profits. Lots of good stuff here on budgeting and other issues.

http://www.mapnp.org
Management Assistance Program for Non-Profits. Some useful books and resources.

http://www.nonprofits.org
Another resource site which contains bibliographies, links, and other information about nonprofit management. It contains a page (http://www.nonprofit-info.org/npofaq/16/57.html) with a useful discussion about how to project expenses when you have no idea what they may be.

http://not-for-profit.org/
The Non-Profit Resource Center. Web links to resources.