The Building Blocks of Budgeting

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The Building Blocks of Budgeting




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Presentations text content in The Building Blocks of Budgeting

Slide1

The Building Blocks of Budgeting

How to prepare meaningful and manageable budgets for your organization

Presented by:

Susan R. Lucato, CGA

Slide2

Susan Lucato, CGA

14 Years Grant Thornton Chartered Accountants

9 Years Victoria Foundation

2 Years consulting practice

Active local volunteer

www.susanlucato.com

Presentation materials will be on-line

Slide3

TODAY

The Building Blocks of Budgeting:

Definition

Development – steps in the process

Budgeting process

Best Practices

Preparation

Components

Key terms / terminology and other important considerations

Slide4

What is a Budget?

“A budget is the numerical expression of an organization’s dreams that serves as a guide or measure of acceptable financial performance.”

Jody Blazek from

Financial Planning for Non-Profit Organizations

Slide5

What is a Budget?

A well constructed operating budget will demonstrate

in numbers

the

organization's commitment to fulfilling its mission

. It will be based on

reliable income projections

and

expense projections will be well-researched, conservative, and thorough

. Those building the budget will understand what components of it are fixed and which can be adjusted as the budget year progresses.

Slide6

Steps for Developing a Good Budgeting Process - Overview

Write it down.

Decide who should be involved and when.

Establish an annualized timeline.

List specific tasks with specific responsibility assignments.

Ensure that budget line items and accounting line items are in sync.

Develop worksheets, templates, and tools that promote inclusion of all relevant budget components and facilitate "what if" scenarios.

Slide7

Budgeting Process

The annual

budgeting process

should be documented, with tasks, responsibility assignments and deadlines clearly stated.

A

good budgeting process:

engages

those who are responsible for adhering to the budget in the creation of the budget,

allows

time for the Finance Committee to participate,

provides

adequate time for research, review, feedback, revisions, etc. before the budget is ready for presentation to the full board

,

Slide8

Budgeting Process (cont’d)

incorporates strategic planning initiatives,

is

characterized by

realistic

projections for income and expense

is

income-based

(expenses do not exceed the realistic income projections)

identifies fixed (indirect)

costs and relates them to reliable revenue,

is

driven both by mission priorities and fiscal

accountability

Slide9

Best Practices - Budgeting

Practice income-based

budgeting

Analyze and understand your revenue

concentrations

Confirm your budget's relationship to your mission and long range/strategic

goals

Don't forget

infrastructure

Budget for capital in addition to

operations

Provide narrative notes to explain budget assumptions to the

board

Pay attention to presentation

Slide10

Who is the budget for?

EVERYONE in the organization – culture

Who prepares – key staff, ED and Treasurer

Who reviews – Finance Committee

Who approves – Board of Directors

Who is ultimately responsible – Board of Directors

NOTE – key staff who prepare budgets should have their performance reviews include the results that are IN THEIR CONTROL

Slide11

Budget Preparation - Steps

1. Key staff, usually accountant / bookkeeper prepare draft budget documents based on prior year and known upcoming commitments

2. Key staff and ED meet to review draft and add / subtract items based on ED’s knowledge of upcoming year

3. Key staff, ED and Treasurer meet to review draft after changes in #2 have been made – further changes based on board strategic initiatives and Treasurer feedback

4. DRAFT Budget goes to Finance Committee for review & comments

Slide12

Budget Preparation - Steps

5. Changes updated by key staff

6. Final DRAFT approved by Finance Committee, “The Finance Committee recommends the budget be presented to the Board of Directors for approval”

7. Board reviews, questions and approves budget

8.

FINAL APPROVED BUDGET saved in electronic files, all other versions should be removed, this budget is

NOT

changed again during the year.

Slide13

Approved Budget

Approved Budget vs. Year-end Forecast

A budget is a forecast or financial plan made at a point in time with the best information at hand.  

As an organization progresses further into the budget year, it only makes sense that better information will become available that would change the previously expected outcome in one or more line items.  

However, unless there has been a truly major change in the organization's structure or programs, it is generally

not a good practice to change a budget once a budget has been approved by the board.  

It is better to create a column on financial reports that shows a Year-End Forecast, or Year-End Projection, based on the new information, and to explain any significant variances from the original budget.

Slide14

Budget line items and Accounting line items - MATCH

A mismatch between budget items and accounting items creates extra work for administrative staff or key volunteers who must translate between the two and risks inconsistencies that undermine the usefulness of financial reports.  

Especially for expenses

, when accounting/financial statement line items exist without corresponding budget line items, it can result in budget overages or erroneously reported line item balances.  

Slide15

Budget components

Organization budget:

Operating

Capital

Department / Project budgets:

Income

Capital

THESE ROLL INTO ORGANIZATION BUDGET

Slide16

Work part-to-whole

The format of the budget to be presented to the board need not have the level of detail that staff or finance committee members see.  

Using detail worksheets as tools to build a "Full Budget" and a "Summary Budget" allows staff and finance committee members to go deep into the trees while presenting the forest to the board.

Link these worksheets, or workbook tabs, to a Full Budget sheet in a single, multi-tab workbook.

Later we’ll look at some examples in EXCEL

BREAK TIME – 15 min

Slide17

Operating Budget

Associated with Statement of

Revenues & Expenditures(Income

Statement, Profit & Loss)

Planning

income and expenses for a single fiscal year to accomplish immediate mission agenda

Can

be projected over multiple years as part of a strategic plan to include implementation of strategic initiatives

Slide18

Operating Budget - Revenues

Associate fixed

costs with reliable

revenue

Contractual income, income from term investments, committed grants, committed donations

Fundraising events, applied for but unconfirmed grants = NOT reliable

Ensure your committed revenues cover your fixed costs

Fixed (indirect) costs = rent, payroll, telephone & technology – anything you spend regardless of whether a program runs this year or not

FIXED = The cost to keep your doors open! If your reliable revenue doesn’t cover your fixed costs – you could find yourself in financial difficulties.

Slide19

Exercise – take away

Take your organization’s operational budget and try to split the costs between direct and indirect.

Then, take the indirect costs and calculate the % of indirect costs / reliable income.

This percentage will help guide you as you grow your reliable income stream and when you are applying for funding.

Slide20

Exercise – take away i.e.

Organization A:

Reliable funding of $2 million per year

Indirect costs of $500K per year

Percentage 25%

This is the percentage you could include in grant applications

Slide21

Budget components – ideas

Supporting analyses:

Year over year staffing history

Year over year income history

Fixed (indirect) vs. Variable (direct)

Fundraising events, plans, history

realistic, & conservative

Ongoing commitments (rent)

mid-budget year increases, moves etc.

Slide22

Direct / Indirect Costs

Direct Costs

Direct costs relate to a

specific project or program

.  

Indirect Costs or Overhead

Indirect costs (sometimes called Overhead or General Administration) do not relate solely and specifically to a particular project or program, but are necessary to its completion.  

A formal indirect cost rate can be calculated and negotiated for some grant proposal budgets when allowed by the funder.

Overhead is a vital budget component for all projects, whether specifically funded or not, and should certainly be taken into account along with direct costs as funding request budgets are composed.  

Slide23

Indirect Costs

Question to ask – does the expense stop if the program stops?

Some costs are allocated across programs, but overall are still indirect – would you lay off the ED if a program was cancelled – likely not - this is an indirect cost.

Rent – same premise – would you be able to lease less space if a program were cancelled – NO – indirect cost.

Slide24

Capital Budget

Associated with Statement of Financial Position (Balance Sheet)

Planning

for optimal cash position (operating & emergency reserves, other strategic

reserves

)

Planning

for capital investments (

equipment upgrade/replacement

, facilities acquisition and/or maintenance, special projects, etc. over a longer time period)

Planning

for long term endowment (if appropriate)

Slide25

Non-profit – a misnomer!

Nonprofits are in fact businesses whose profits (surpluses) remain with the (non-profit) corporation rather than going to individuals or shareholders as in the for-profit business model

"not-for-profit"

does not mean

"no surplus allowed"

Nonprofits need operating reserves.  Operating reserves or working capital funds create liquidity and financial flexibility for the organization.  Organizations with a strong working capital position can focus beyond day-to-day cash flow needs and more

effectively plan for the long-term health of the organization

.  

Slide26

Capital Budget – Operating Reserve Funds

Organization can be thrown into

cash flow stress

Become distracted from good long-term decision-making or forced to make expensive short-term crisis-based decisions

May not have the resources to continue delivery of its programs

Organizations with limited or negative working capital by necessity focus on the short term and are less likely to engage in responsible long-term planning.  

Building operating reserves is a top priority.

Slide27

Example – Internal Restrictions/ Contingency Funds

Removes “operating surplus” excesses

Rainy day source of operational funding OR savings for planned expenditures

COMMON names:

Building R&M Fund

Capital Purchases Fund

Operating contingency Fund

Slide28

Operating Reserves – Plan

Set a target each year – much like a Strata Plan does – i.e. 1% of reliable revenues

Make the building of a long-term reserve just as much of a priority as the short-term funding of your project(s)

Build the “expense” of the reserve into your operating budget – bottom line

Create recurring board motion to approve funds - $ doesn’t need to physically move – operating reserve is an appropriation of surplus

Slide29

Project / Department Budgets

It’s important to understand that often staff preparing and managing these may not have a strength in this area – often this results in these budgets being prepared quickly, without care and lacking the back-up information to support the assumptions underlying the numbers.

Slide30

Project / Departmental Budgets

Support

from bookkeeper/controller is essential

Review

by bookkeeper/controller is essential

Consistency

between departments (format)

Consistency

of reporting (to finance dept)

Accountability

is KEY

Slide31

Project / Department Budgets

Detailed

Realistic

Manageable

Based on past results and current strategic initiatives

Beware optimism – reliable funding

Embrace caution – variable funding

Team approach – ED, project team, finance

Slide32

Project / Dept Budgets

Must “feed into” operational budget

Timing – incorporate into annual budget planning process

Staff preparing need to be fed certain pieces of information – such as salary allocation of staffing – they should NOT be provided with detailed staffing information

Slide33

Project / Dept Budgets

Based on realistic income – prove income estimates in budget document – scan supporting information and include in presentation to controller & ED

Research expenses under your control

Get estimates of expenses from controller for other items you do not control i.e. Overhead allocation, staffing

Slide34

Budgets for Grant Applications

Most grant-makers will request both a general operating budget and special project budget (if applicable).

Budgets are cost projections. They are also show the funder how your project will be implemented and managed.

Good budgets reflect carefully planned projects.

Slide35

Budgets for Grant Applications

Include your organization’s YE financial statement

Include specific notes and explanations, just as you would if explaining to your finance committee or board

Include direct costs / overhead

Slide36

Review of Budget Results

Controller to ED and Treasurer – detailed results

Finance Committee Distribution – detailed results

Feedback – all above involved

Board of Directors Distribution – summary results

Treasurer presents results

Finance Committee and key staff support

Slide37

Review of Budget Results

High dependence on non guaranteed income sources (fundraising, grants)

Significant, unexplained changes in expenses – particularly large % expenses.

I.e. Don’t focus on a $200 change in a $1,000 account – focus on a $20,000 change in a $100,000 account – both are 20% - so think before you spend time on immaterial items.

Significant, unexplained changes in revenues

Mission drift – too many new programs – loss of core programs and other issues

Year upon year of deficits – it’s not a bad thing to be a non-profit with a profit!

Slide38

Review of Budget Results

Line of Credit balance

Unsecured debt

Un-secured investments (stocks, bonds)

Related party amounts (to/from employees or related orgs)

Capital Asset balances – are they relatively current – I.e. Is a write-down in value warranted?

Inventory – was a count performed – by whom and when?

External and Internal Restrictions

Slide39

Review of Budget Results

TIMING:

Budget to actual results –

quarterly

is a good habit, monthly is too often UNLESS you are in a period of financial uncertainty

Delays in reporting may indicate lack of experience in finance department – this is an important area of continuing education for staff (as well as board)

Slide40

Vocabulary

Assets

, in general, are possessions having value. In accounting, assets are resources owned, or in some cases controlled, by an individual or organization as a result of transactions or events from which future economic benefits are expected to flow to that individual or organization.

Contributions

are non-reciprocal transfers to a not-for-profit organization of cash or other assets or non-reciprocal settlements or cancellations of its liabilities. Government funding, grants and donations provided to a not-for-profit organization are considered to be a contributions.

Current assets

are those assets that are in the form of cash, or expected to become cash within the coming year.

Current liabilities

are those obligations that have to be paid within the coming year.

Slide41

Vocabulary

Net assets

, sometimes referred to as equity or fund balances, is the residual interest in a not for-profit organization’s assets after deducting its liabilities. Net assets may include specific categories of items whose use may be either restricted or unrestricted.

Restrictions

are stipulations imposed that specify how resources must be used. External restrictions are imposed from outside the organization, usually by the contributor of the resources. Internal restrictions are imposed in a formal manner by the organization itself, usually by resolution of the board of directors.

Slide42

Vocabulary

Fixed costs

are not ordinarily affected by the number of projects, programs, plays, workshops, or classes given or clients served.  Examples of fixed costs: permanent fulltime staff, office rent, principal & interest payments on a long-term loan.

Variable costs

are usually project-oriented and are more controllable or adjustable.  Examples: number of characters in a play, number of participants served by a program, number of weeks a program runs, number of exhibitions or concerts, local or international, additional space rental requirements, etc.

Semi-variable costs

are in between - these must happen but can be mitigated somewhat.  Examples: choosing color vs. black & white for a print job, bulk ordering of necessary items, short-term rental vs. purchase of equipment, engaging part-time temporary help rather than hiring fulltime permanent staff, etc.

Slide43

Vocabulary

Non-cash Budget Items

Depreciation

is a way to spread the expense of a large capital purchase over the number of years it will be in use

In-Kind Contributions

In-kind contributions are

net-zero

.  That is, the contribution and the expense are equal, so they do not affect the bottom line net income, but they do increase the magnitude of the income and expenses.  When budgeting for in-kind contributions, it is extremely important to ensure that the in-kind expenses are budgeted as well as the income.  It would not be a good thing to balance a budget with non-cash income covering cash expenses.

Slide44

Thank you!

Check out my website:

www.susanlucato.com

for resources and copies of today’s presentation

Slide45

Articles of Interest

www.bdo.ca/en/Library/Industries/not-for-profit/pages/Under-Control-Proper-Financial-Controls-Can-Protect-Your-Nonprofit.aspx

Under Control: Proper Financial Controls Can Protect Your Non-profit

www.cica.ca

Various publications for the non-profit sector – free

downloads - Publications tab

www.nonprofitaccountingbasics.org

Various publications, articles and advice on running the financial side or your non-profit organization

Slide46

Sources & Resources

Non-profit Accounting Basics

www.nonprofitaccountingbasics.org

Canada Revenue Agency

www.cra-arc.gc.ca

Volunteer Victoria

www.volunteervictoria.bc.ca

Charity Village

www.charityvillage.com

Imagine Canada

www.imaginecanada.ca

Office of the Information and Privacy Commissioner for BC

www.oipc.bc.ca

BC Societies Act

www.bclaws.ca/EPLibraries/bclaws_new/document/ID/freeside/00_96433_0

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