Joan M. Renner, CPA, CGMA, Director 501(c)(fit!)
In last week’s FIT! TIP, we talked about the bridge between ideas and action: your budget process. We outlined who to choose for your budget team and how to schedule out your budget process to paint a picture of what you plan to do, using numbers instead of paints. Now how exactly do you paint that budget picture?
Don’t you just take the last budget and add a cost of living increase? Well, that’s more like a photocopy than a painting. There’s no room for creativity.
Take a tip from the old masters. They didn’t start a painting by copying the last painting and adding 3% for cost of living. The great artists would start by planning and composing their painting with a sketch, arranging everything they wanted to portray in the picture.
So, plan and compose your budget the same way. What do you want to fit in? What are your Board’s goals and priorities? Whether you have a formal strategic plan, or an informal idea of where you’re headed, gather your budget team for a kickoff meeting, and sketch out your year.
After finishing their sketch, the old masters would identify the colors they wanted to use in the painting so they could grind the right pigments to make the paint that would bring their composition to life. Similarly, if your budget picture is painted using numbers, you have to grind out some numbers to use to bring your sketch to life.
Who’s going to do that? Your controller or CFO (in-house or outside) can help maintain a spreadsheet to keep the budget development organized. Have a column for this year’s budget and a column to show how this year will actually end up. Leave space for your team to fill in next year’s budgeted numbers.
Your best strategy for developing your budget is to divide and conquer. Divide your costs into functional areas and assign them to the individuals on your budget team responsible for each area, to fill in next year’s expected amounts. Team up a program person with a financial person for a powerful combination of skills.
At this point, don’t edit your costs too much based on what you can afford or what your existing staff can handle. The Finance Committee and Board can make those choices later. For now, focus on what it will cost to carry out the proposed activities the way they should be done.
To grind out your numbers, consider last year’s experience, and preliminary plans for new activities. If we do that new activity, how much will it cost? Will we need to bring on an outside coordinator to manage it? If necessary, get outside estimates of the cost of new items. For existing costs such as your office lease and your health insurance, check for scheduled increases and expirations. Will you have to lease a new copier? Be sure to give yourself a cushion. Always estimate big where expenses are concerned so you won’t be caught short.
This will give you a good idea of how much your proposed activities will cost. Now, it’s time to identify whether you will be able to pay for it all. Estimate what you expect to bring in from each source of income. Consider your past experience, current trends and preliminary plans. Be sure to remove any one-time donations from next year’s expectation. By all means, DON’T plug the budget with aspirational income. Always estimate small when it comes to income, so you wont’ be caught short.
At this point, pull it all together and review your draft budget with your Finance Committee. Priorities are a Board decision, so don’t take all the stress of balancing the budget on your shoulders. Identify sticking points, propose solutions and let them choose.
With guidance from the Finance Committee, make revisions and get their approval. Now you’re ready to take your budget masterpiece to the Board. You’ve used your budget development process as the bridge between ideas and action. You’ve ended up with a budget that’s the financial expression of your goals and strategies for the year; and it’s suitable for framing.
To find out more about budgeting, check out the Building Your Budget—and putting it to work session at the upcoming live seminar, 501(c)(fit!)— Financial Intensive Training for the Nonprofit Executive.
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