The Budget-Building Book for Nonprofits: A Step-by-Step Guide for Managers and Boards (The Jossey-Bass Nonprofit Guidebook Series)

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The Budget-Building Book for Nonprofits A Step-by-Step Guide for Managers and Boards Second Edition

Murray Dropkin Jim Halpin Bill La Touche

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Praise for The Budget-Building Book for Nonprofits

First Edition “This is a book every nonprofit needs.” —Peter F. Drucker “Provides clarity, strategy, and utility to the financial and asset management of social-sector organizations.” —Frances Hesselbein “This book is clear, insightful, and required reading for all who are responsible for the success of not-for-profits. If you work for or run a not-for-profit agency, you should read this book.” —Peter Block, author of Flawless Consulting and The Empowered Manager “The Budget-Building Book for Nonprofits is a definitive and practical guide to the art of budgeting. It is well-written and reliable, as well as easily understandable.” —Ronald J. Werthman, vice president, finance/treasurer, and CFO, Johns Hopkins Health System, The Johns Hopkins Hospital

Second Edition “This book is the gold standard for providing executives and managers with information essential to making the best decisions for their organization, and it will give them the confidence in their fiscal systems that they need in the competitive world of nonprofit management.” —Don Sykes, former director, Office of Community Services for the Clinton Administration and President, Community Development Solutions

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“This book is an indispensable step-by-step guide for managers of not-forprofits. Written in clear language easily understood by the layman, it contains guidance on both proper procedures and the real-world challenges of getting the organization to adopt them. The worksheets and sample forms alone are worth the price.” —Elizabeth Rosen, retired chief financial and systems officer, The Morgan Library and Museum “Everything you ever wanted to know about budgeting and didn’t know who to ask is contained in this second edition of The Budget Building Book for Nonprofits. It’s practical, sophisticated, and contains many useful forms and examples. Whether you are an experienced nonprofit executive, board member, or finance person or new to the field, you will want to add this budget book to your library. It’s a tremendous resource for everyone who works or volunteers to support the nonprofit sector.” —Carol Wolff, executive director, Area Health Education Center, Camden, New Jersey “The second edition of The Budget-Building Book for Nonprofits presents a primer for managers with limited financial expertise and resources in nonprofit settings. In my 20 years of consulting to behavioral health systems, these kinds of adjustments are often the critical difference in the financial health of an organization. This book should be mandatory reading for the non-financial administrator of any nonprofit organization.” —Harvey E. Hoffman, president, Healthcare America, Inc. “Too often the process of building a budget in nonprofit organizations fails to receive the attention and focus appropriate to its importance. When a properly constructed budget is used effectively it represents far more than a simple spending plan. Rather, it becomes a guiding statement of values and priorities and a road map for how the organization plans to achieve its goals for the budgeting period. That view—carefully honed by these highly skilled authors after many years of experience on the front lines—is well captured in this second edition of The BudgetBuilding Book for Nonprofits and forms the foundation for the practical methods so clearly presented. Nonprofit executives and their boards of trustees alike will be well-served by this edition and well-advised to make it their own.” —Alan G. Kaufman, former director, New Jersey Division of Mental Health Services, and president, Argus Solutions for Behavioral Health

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“The budget-building book is a clear, well-written guide for nonprofit managers, whether experienced or new to the job, and demonstrates the importance of the budgeting process. Using plain language and real-life examples, the authors provide a comprehensive and systematic approach to developing and monitoring the budget. It should be required reading for all nonprofit managers and boards.” —Irwin Nesoff, associate professor and director of the New Jersey Institute for Nonprofit and Social Work Management, Social Work Department, Kean University

Spotlight Review (of the First Edition) on Amazon ★★★★★ Budget Management, April 23, 2006

By Alex Nalicat “nalicat” (CA, USA) When I purchased this book I thought it might be outdated for my organization. I was wrong; this is an excellent budget workbook. The authors did an excellent job in bringing to light the complex and problematic issues of budgeting for nonprofit organizations, and they take you step by step through the process. The BudgetBuilding Book for Nonprofits covers everything from starting a budget to the financial reporting of the budget. This book also provides numerous samples of budgets. If you’re a budget manager or director, this book should give a fresh new way to look at the budgeting process.

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The Budget-Building Book for Nonprofits A Step-by-Step Guide for Managers and Boards Second Edition

Murray Dropkin Jim Halpin Bill La Touche

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C 2007 by John Wiley & Sons, Inc. All rights reserved. Copyright 

Published by Jossey-Bass A Wiley Imprint 989 Market Street, San Francisco, CA 94103-1741 www.josseybass.com Wiley Bicentennial logo: Richard J. Pacifico No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the Web at www.copyright.com. Requests to the publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at www.wiley.com/go/permissions. Certain pages from this book and all the materials on the accompanying CD-ROM may be customized and reproduced. The reproducible pages are designated by the appearance of the following copyright notice at the foot of each page: C 2007 by John Wiley & Sons, Inc. All rights reserved. Copyright 

This notice must appear on all reproductions as printed. This free permission is restricted to limited customization of the CD-ROM materials for your organization and the paper reproduction of the materials for educational/training events. It does not allow for systematic or large-scale reproduction, distribution (more than 100 copies per page, per year), transmission, electronic reproduction or inclusion in any publications offered for sale or used for commercial purposes—none of which may be done without prior written permission of the Publisher. Readers should be aware that Internet Web sites offered as citations and/or sources for further information may have changed or disappeared between the time this book was written and when it is read. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. Jossey-Bass books and products are available through most bookstores. To contact Jossey-Bass directly call our Customer Care Department within the U.S. at 800-956-7739, outside the U.S. at 317-572-3986, or fax 317-572-4002. Jossey-Bass also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Library of Congress Cataloging-in-Publication Data Dropkin, Murray. The budget-building book for nonprofits: a step-by-step guide for managers and boards/Murray Dropkin, Jim Halpin, and Bill La Touche. — 2nd ed. p. cm. ISBN 978-0-7879-9603-1 (paper/cd) 1. Nonprofit organizations—Finance. 2. Budget in business. I. Halpin, James. II. La Touche, Bill. III. Title. HG4027.65.D76 2007 658.15’4—dc22 2007021302 Printed in the United States of America second edition PB Printing 10 9 8 7 6 5 4 3 2 1

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Contents

Preface Acknowledgments to the First Edition Acknowledgments to the Second Edition The Authors Introduction: How to Use This Book PART ONE 1

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UNDERSTANDING BUDGETING BASICS Why Budgets and Budgeting Are Important to Nonprofits A The Importance of Budgets and Budgeting B The Basic Characteristics of Budgeting Understanding Basic Types of Nonprofit Budgets: Overview A Organization-Wide Operating Budgets B Operating Budgets for Individual Programs, Units, or Activities C Capital Budgets D Cash Flow Budgets (Cash Flow Forecasts) E Opportunity Budgets F Zero-Based Budgets Key Board and Staff Roles and Responsibilities in Nonprofit Budgeting A The Board’s Role B Executive Director’s, President’s, or CEO’s Role C Chief Financial Officer’s Role D Program, Unit, or Activity Manager’s Role E Department Manager’s Role F Other Possible Participants

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Establishing Budget Guidelines, Priorities, and Goals A Establishing Guidelines B Identifying Priorities C Setting Organization-Wide Goals D Setting Individual Program and Unit Goals How Different Sources and Types of Income Can Affect Budgeting A Unrestricted Funds B Contract or Grant Agreement Funds C Restricted Contributions D Income from Trade or Business Activities E Asset-Generated Income F Cash and Noncash Contributions, Including Pledges G Funds Requiring a Cash or In-Kind Match Strategies for Developing Organization-Wide Operating Budgets A Strategy 1: Set Annual Organization Outcome Goals from the Top Down B Strategy 2: Set Annual Income and Expense Targets from the Top Down C Strategy 3: Request Draft Budgets That Show Priorities from Program or Unit Heads D Strategy 4: Use Zero-Based Budgeting 1 Possible Problems with ZBB 2 Benefits of ZBB

STEP-BY-STEP BUDGETING GUIDELINES Start with the Budget-Building Checklist Designing Your Budgeting Policies and Procedures A Basic Budgeting Policies and Procedures B Basic Income Projection Policies and Procedures C Basic Expense Projection Policies and Procedures D Basic Cash Flow Projection Policies and Procedures E Policies Establishing the Fiscal Year F Other Needed Policies and Procedures G Checklist for Information to Include in Written Policies H Final Review and Integration Creating Your Budgeting Calendar A Five Steps for Developing the Budgeting Calendar B Instructions for Creating an Annual Budgeting Calendar

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Orienting Program and Department Managers and Staff to Budgeting A Budget Team Meeting B Practical Considerations When Planning Budget Team Meetings Contents of the Annual Budget Preparation Package Developing Organization-Wide Operating Budgets A Five Steps to Prepare for the Annual Budgeting Process B Five Steps to Create Annual Budgets Developing Operating Budgets for Individual Programs, Units, or Activities A Planning for Program or Unit Budget Development B Basic Steps in Creating a Program or Unit Budget C Setting Two Kinds of Program or Unit Goals D Preparing a Program or Unit Workplan E Identifying the People and Things Needed to Implement a Workplan F Identifying Personnel Costs G Identifying “Other Than Personnel” Cost Categories H Identifying Specific Line-Item Costs I Providing Budget Justification or Cost Documentation J Matching and In-Kind Contributions K Distributing Copies of Final Program or Unit Budgets Major Components of Operating Budgets A Projected Income B Projected Expense Categories and Subcategories C Projected Expenses by Line Item D Budget Narrative or Justification Estimating Income and Expenses A Estimating Future Income 1 Making Needed Annual Policy Decisions 2 Projecting Various Kinds of Income B Estimating Expenses 1 Annual Policy Decisions 2 Projecting Salaries and Wages 3 Projecting Fringe Benefits 4 Projecting Other Operating Costs C Summarizing Proposed Changes in Draft Budgets D Budget Highlights Allocating Administrative, Overhead, and Shared Costs A Allocation Methods B Worksheet for Allocating Costs

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Revising Draft Operating Budgets A Updating Fiscal Projections B Trimming Draft Budgets C When More and Deeper Cuts Are Needed D Avoiding Potential Budget-Cutting Problems Zero-Based Budgeting (ZBB) A Overview B Five Basic Questions C Information Provided by the Program D Potential Demand E Break-Even Analysis F Decision Time G Getting Started with ZBB Capital Budgeting A Strategic Fit B Viability C Return on Investment D Financing 1 Mortgages and Loans 2 Lines of Credit 3 Leases 4 A Note on Bond Financing E Two Types of Capital Projects F Cash Flow Budgeting or Forecasting G Final Considerations Presenting Your Annual Budget Proposal to the Board A Letter of Transmittal B Total, Organization-Wide Budget Summary C Program, Unit, or Activity Budget Summaries D Detailed, Organization-Wide, Line-Item Expense Budget E Individual Program or Unit Budgets F Other Useful Information Board Review, Revision, and Approval of the Final Budget Cash Flow Reporting, Forecasting, and Management A Fundamentals of Cash Flow Forecasting B Cash-Basis Accounting for Cash Inflows C Cash-Basis Accounting for Cash Outflows D Cash Flow Forecasting Based on the Operating Budget 1 Reviewing the Operating Budget 2 Adjusting the Operating Budget to Create the Cash Flow Forecast

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E Reviewing and Approving the Cash Flow Forecast F Short-Term Cash Flow Forecasting G Periodically Reviewing the Cash Flow Forecast H Corrective Actions for Forecast Cash Shortages I Cash Flow Reporting, Monitoring, and Analysis Monitoring and Modifying Approved Budgets A Regular, Timely Financial Reporting and Monitoring B Planning and Taking Corrective Action C Modifying Budgets 1 Reasons for Modifying an Approved Budget 2 Creating Written Budget Modification Policies and Procedures D Cash Flow Projections and Planning 1 Causes of Cash Flow Problems 2 Using Monthly Projections for Planning 3 Addressing Cash Shortfalls 4 Some Possible Drawbacks Conclusion

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PRACTICAL BUDGETING RESOURCES Resource A: Master Worksheet for Creating a Program or Unit Workplan Resource B: Worksheets with Sample Budget Formats Resource C: Examples of Financial Reports for Analyzing and Monitoring Income and Expenses Resource D: Tools for Analyzing Financial Reports and Planning Corrective Action Resource E: Example of a Detailed Organization-Wide Expense Budget Resource F: Additional Useful Checklists and Examples Resource G: Tools on the Accompanying CD

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How to Use the CD

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Exhibits 9.1 13.1 13.2 14.1 15.1 15.2 18.1 19.1 19.2 20.1 20.2 22.1 22.2 23.1 C.1 C.2 C.3 C.4 C.5 C.6 D.1

Sample Budgeting Calendar for a Large Nonprofit Sample Program or Unit Workplan Justification of Travel Expenses Projected Expenses by Line Item Sample Form for Summarizing Proposed Draft Budget Changes Example of One Unit’s Budget Assumptions and Highlights Break-Even Analysis Internal Rate of Return Calculation Completed Initial Project Budget Sample Letter of Transmittal ABC Corporation Summary Expense Budget for Board Review Summary of Conversion from Operating Budget to Cash Flow Forecast Universal Nonprofit Worksheet to Prepare an Annual Cash Forecast for Fiscal Year 20x8 Sample Cash Flow Budget for a Six-Month Period Sample Three-Month Line-Item Financial Report Sample Monthly Financial Report Sample Quarterly Financial Report Sample Budget Variance Report Sample Management Report—Income and Expenses Sample Management Report for Monitoring Administration Sample Analysis of Individual Line-Item Expense Variances (Budgeted Versus Actual) in Excess of $3,000 or of 3 Percent

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D.2 E.1 F.1

Sample Analysis of Budgeted-Versus-Actual Expense Variances by Income Source Sample Detailed Organization-Wide Expense Budget by Program Sample Introduction to the Budget Package

Worksheets 6.1 6.2 6.3

6.4 9.1 11.1 11.2 13.1 15.1 15.2 15.3 16.1 21.1 21.2 23.1 A.1 B.1 B.2 B.3 B.4 B.5 B.6 B.7 B.8 C.1 C.2

Setting Annual Top-Down Organization Outcome Goals to Guide the Development of Draft Program and Unit Budgets Checklist for Setting Annual Top-Down Income and Expense Targets to Guide the Development of Draft Program and Unit Budgets Setting Percentage Variations for Program and Unit Heads to Use When Preparing Draft Budgets Showing Priorities for Increased, Decreased, and Unchanged Total Budget Amounts Zero-Based Budgeting Creating an Annual Budgeting Calendar Program or Unit Budgeting Instructions Budgeting Guidelines for Programs or Units Planning to Prepare a Program or Unit Budget Identifying Sources, Types, and Amounts of Funds Analyzing the Certainty of Future Income Summarizing Proposed Draft Budget Changes Identifying and Allocating Administrative, Overhead, and Shared Costs Preparing for Board Review of Proposed Budget Checklist for Board Review of Proposed Budget Form for Requesting Budget Modifications for Current Fiscal Year Creating a Program or Unit Workplan Budget Format for a Community Services Organization Expense Budget Format for a Museum Curatorial Department Expense Budget Format for a Building and Security Department Expense Budget Format for a Membership Department Budget Format for a Museum Exhibition (or Other Special Event) Blank Budget Form (with Instructions) Format for a Capital Project Budget Format for a Capital Budget for a Building Budgeted Versus Actual Year-to-Date Income and Expenses for a Small Foundation (by Unrestricted and Temporarily Restricted Funds) Budgeted Versus Actual Year-to-Date Income and Expenses for a Small Foundation (by Major Activities)

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C.3 C.4 C.5 D.1 D.2 D.3 E.1 F.1 F.2 F.3

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A Housing Development Corporation’s Revenue and Expense Report A Housing Development Corporation’s Combined Real Estate Management Revenue and Expense Variance Report A Housing Development Corporation’s Departmental Revenue and Expense Report Analyzing Financial Reports and Planning Corrective Action Analyzing Line-Item Expense Variances (Budgeted Versus Actual) Analyzing Budgeted-Versus-Actual Expense Variances by Income Source Detailed Organization-Wide Expense Budget by Program Checklist for Effective Mission Statements Program Change Request Form New Position Request Form

Software CMS Nonprofit Budget Builder

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First Edition Dedicated to Thomas H. Gregory, a great friend and mentor

Second Edition Dedicated to Bill La Touche, coauthor of the first edition of this book and a great friend, mentor, and writer

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Preface

DESPITE AN INCREASINGLY complex regulatory atmosphere and shrinking funding sources, the nonprofit sector continues to grow in size and importance. Recent Internal Revenue Service (IRS) statistics identify approximately 1.8 million taxexempt organizations in the United States, not including organizations claiming tax exemptions as religious organizations. In recent years as many as ninety thousand applications have been received by the IRS requesting tax-exempt status. The number of Americans who are in some way involved with tax-exempt organizations continues to expand at an incredible pace. According to the IRS the tax-exempt sector had total assets of $3.7 trillion and revenues of $1.2 trillion as of the end of 2002. Tax-exempt organizations are a major employer and a vibrant part of the local and national economy. The ways in which nonprofits are supported, regulated, and monitored by government makes them far more complex than comparable commercial organizations in almost every area of operation. Nonprofits are subject to a much wider range and a greater degree of government and private regulation and oversight than are most commercial entities. Thus nonprofits may have more complex accounting systems, budgeting processes, auditing procedures, taxation considerations, and financial and organizational management concerns than for-profit organizations do. News of financial mismanagement in tax-exempt organizations always seems to get magnified in the press and in public discussions. Donors and government funding sources react very quickly to news of a nonprofit’s financial problems because such organizations are supported with public funds and routinely scrutinized by the public. Sometimes tax-exempt organizations take public positions that are not popular; this may also make them especially vulnerable to bad press.

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Recent legislation aimed at “reforming” the oversight of nonprofit organizations, modeled after the Sarbanes-Oxley federal law, has been passed by some state legislatures and is being considered by a number of others. The new legislation has increased the scrutiny of the financial operations of nonprofit organizations. In the long run such legislation may strengthen the tax-exempt community, because stronger financial controls are important. However, in the short run such pressure finds nonprofits increasingly under the microscope of government and other regulatory agencies. This, coupled with greater competition for funds, has forced many nonprofits to reevaluate everything from how they conduct day-to-day operations to their overall strategic plans, in order to stay viable. We found out very early in our work with tax-exempt organizations that underlying every aspect of nonprofit operations is the budget. The budgeting process is the foundation on which any nonprofit’s long-term and short-term health rests. Budgets are required before organizations can apply for funds from most funding sources. Yet our search for information yielded very few budgeting resources written specifically to offer step-by-step guidance to nonprofit managers, boards of directors, financial staff, and the consulting and accounting professionals that serve them. The purpose of this workbook is to offer practical assistance to the people involved in preparing budgets for nonprofit organizations. Since 1965, we have been assisting small ($100,000), medium ($10 million), and large ($2 billion) nonprofit organizations to plan, develop, process, and implement program, capital, operating, zero-based, department, cash flow, and various other budget programs, analyses, and reports. We have trained thousands of board members, financial staff, managers, and program staff in proper budget preparation. We have also trained funding-source staff at government and private organizations. What we have found, across the board, is that the tools available for budgeting are difficult for anyone other than highly specialized financial professionals to understand, are difficult to apply to the unique circumstances in which many nonprofits operate, or are wonderful in their explanation of the theoretical principles but do not detail the nuts and bolts of budgeting. We wrote this workbook to offer nonprofits and their stakeholders a comprehensive and systematic approach to developing and monitoring a budget. One of our most important objectives was to create a resource that is understandable and useful to those with no financial background as well as those with formal financial training. To accomplish this objective we have incorporated detailed explanations, checklists, worksheets, examples, and simple-to-use forms to address every phase of the budgeting process. The first edition of this book has been very well accepted, and many organizations are using it to help guide staff through the budget process. A number of colleges and universities are using the first edition for courses on budgeting and

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finance. Reader feedback and our own desire to make the book more useful have led us to add three new chapters in this second edition. These new chapters are devoted to capital budgeting, zero-based budgeting, and cash flow forecasting. In addition, we have included a CD with tools to help you implement the concepts in this book. We believe The Budget-Building Book for Nonprofits is a practical resource for anyone involved in the budgeting process of a small, medium, or large nonprofit— whether a thorough review of overall budget methodology is needed or just a minor reworking of the budget preparation process. The Budget-Building Book for Nonprofits is divided into three parts that may be used independently or as a complete, sequential package. Part One introduces and provides an orientation to budgeting basics. The chapters in this part present an overview of the common types of nonprofit budgets, the key roles of the various players in developing a budget, overall budgeting strategies, and the effects of different sources of nonprofit revenue on a budget. Part Two contains information and tools for the hands-on development of budgets and supporting documentation. Some of the elements are step-by-step descriptions and instructions for developing organization-wide and program budgets; developing a budgeting calendar; establishing budgeting goals, priorities, guidelines, policies, and procedures; creating budgeting forms; and estimating and projecting income and expenses. The chapters in this part then detail the final steps in the budgeting process, from revising draft budgets to final budget approval. Among the topics are developing and presenting budget proposals to the board of directors, establishing systems for board review and revision of budgets, and monitoring and modifying approved budgets. This part contains checklists, worksheets, and tips for preparing for, navigating through, and streamlining the budgeting process. Our goal is to demystify and systematize budget development. Part Three contains a broad collection of sample forms and illustrative materials, including a master worksheet for creating a program or unit workplan, an example and a worksheet for a detailed organization-wide expense budget, and worksheet samples of budgeting forms for several different types of programs. Due to the comprehensive nature of this workbook, many of the topics are discussed in several places. Depending on your experience and requirements, you may find that you prefer to jump to particular topics rather than to read the book in a linear fashion. Important topics are covered in multiple chapters to provide you with the information you need regardless of how you use this book. In our years of experience in dealing with every aspect of nonprofit finances, we have found that nonprofit organizations with effective budgeting practices have a substantial edge in competing for funding over those that lack such practices. Successful organizations also use some of the tools found in this book to monitor

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and adjust their budgets as situations unfold. We believe that the potential exists within every nonprofit to budget effectively and efficiently. This book can give your organization and your budget team a budget edge that will lead to future success. June 2007

Murray Dropkin Brooklyn, New York Jim Halpin Edison, New Jersey

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Acknowledgments to the First Edition

A NUMBER OF PEOPLE gave us their time, effort, and encouragement as we researched, wrote, reviewed, and revised this workbook. We truly appreciate the contributions of Allyson Hayden; David H. Freed, president, Overlook Hospital; Philip M. Henry, publishing consultant and freelance writer and editor; Sylvan Leabman; Kate Miller; Scott Phillips; Edward Kitrosser; Pendar Digges La Touche; Ronald J. Werthman, vice president of finance, treasurer, and chief financial officer, Johns Hopkins Health System Corporation; and Carol Wolff, executive director, Camden Area Health Education Center. We also are sincerely grateful to Eusebio David, controller, MBD Community Housing Corporation; Theresa Dominianni, partner, Dropkin & Company; C. Roy Epps, president, Civic League of Greater New Brunswick; Eric Havemann and Shirley Dey, Dropkin & Company; Diane Hubka; Wendy Kolb, business manager, Community Legal Aid Society; Kirk Lindsay, controller, Northern Manhattan Improvement Corporation; Ralph Porter, president, MBD Community Housing Corporation; Elizabeth Rosen, controller, Pierpont Morgan Library; Judith A. Schuenemeyer, executive director, Community Legal Aid Society; and Kathryn Talmadge. We also thank Goldie and Lisa Dropkin, as well as Kit La Touche. Finally, we are grateful to Alan Shrader and his colleagues at Jossey-Bass for all their encouragement and help in publishing this book.

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Acknowledgments to the Second Edition

WE TRULY APPRECIATE the contributions of Philip M. Henry, publishing consultant and freelance writer and editor; Sylvan Leabman; Pendar Digges La Touche; Ronald J. Werthman, vice president of finance, treasurer, and chief financial officer, Johns Hopkins Health System Corporation; Eric Havemann, HSH Associates; Jillen Jobe; Theresa Dominianni, CPA; Vincent Milito, CPA, Sarowitz, Milito and Company; Eusebio David; Shawn Stack, CPA; Edward Kitrosser, CPA; Harvey Hoffman, president, Healthcare America, Inc.; Don Sykes, former director of the Office of Community Services for the Clinton Administration and president of Community Development Solutions; Alan Kaufman, director (from 1987 to 2005) of New Jersey Division of Mental Health Services; Liz Rosen, chief financial and systems officer, retired, The Morgan Library and Museum; Irwin Nesoff, associate professor and director of the New Jersey Institute for Nonprofit and Social Work Management, Social Work Department, Kean University; and Carol Wolff, executive director, Camden Area Health Education Center. We also thank Goldie Dropkin, Jan Halpin, and Lisa Dropkin, as well as Madeleine Stephan, Louis Stephan Jr., Louis Stephan Sr., Jim Halpin III, Brian Halpin, Kate Halpin, and Jamie Halpin. Finally, we are grateful to Allison Brunner, acquisitions editor; Jesse Wiley, associate editor; Nina Kreiden, senior production editor; Elspeth MacHattie, copyeditor; Diane Turso, proofreader; and all of our colleagues at Jossey-Bass for their encouragement and help in publishing this book.

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The Authors

MURRAY DROPKIN is the president of CMS Systems, Inc., and the managing partner of Dropkin & Company, Certified Public Accountants. Both firms specialize in working with nonprofit organizations. Dropkin’s experience with nonprofit budgeting spans four decades, during which time he has participated in the budgeting processes of virtually every type of nonprofit organization, from child welfare and protection agencies to mental health organizations to theater development organizations to university-based academic medical centers. He has trained staff and board members in effective budgeting techniques and has assisted an extensive number of organizations with budget development. Dropkin has published extensively in the field of nonprofit accounting and is coeditor of Nonprofit Report, a monthly newsletter. He is also the coauthor (with Allyson Hayden) of The Cash Flow Management Book for Nonprofits and (with Jim Halpin) of Bookkeeping for Nonprofits, both published by Jossey-Bass. He is a coauthor of the Guide to Audits of Nonprofit Organizations, published annually since 1989. Dropkin earned his BS degree at Brooklyn College and his MBA degree at New York University. He is a certified public accountant in the states of New York, New Jersey, and Wisconsin and a member of the American Institute of Certified Public Accountants and of the New York and New Jersey state CPA societies. He can be reached at [email protected]. JIM HALPIN is a software developer, systems consultant, and accountant specializing in cost accounting concepts applied to the long-term health care, legal, transportation, manufacturing, and retail industries. He is a certified public accountant in New Jersey. He has thirty years of experience in accounting, auditing, taxation, management consulting, software development, and computer consulting. He developed a job cost accounting software package that was widely used in the construction industry. He is the coeditor of the monthly newsletter Nonprofit Report,

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the coauthor (with Murray Dropkin) of Bookkeeping for Nonprofits, and the author of articles published in professional business and computer magazines. Halpin is a member of the New Jersey Society of Certified Public Accountants. He holds an MS degree in management systems analysis and a BS degree in management science from Kean University. He can be reached at [email protected]. BILL LA TOUCHE, a former university teacher and community organizer, was coeditor of Nonprofit Report and coauthor of the first edition of this book. Over a thirtyyear span, he used his writing, planning, training, and organizing skills to help a wide range of individuals, groups, and organizations. He created numerous training, personnel, self-study, and orientation manuals; employee handbooks; funding and development materials; policy and procedure guides; and public information literature. He was a fellow of the Institute for Individual and Organizational Development.

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Introduction

How to Use This Book

THE BUDGET-BUILDING Book for Nonprofits covers the subject of nonprofit budgeting from a practical, hands-on perspective and presents the material so that someone who has never participated in the budgeting process may be able to do so with confidence. We believe as well that even those with extensive budgeting experience or other financial background will find a great deal of helpful information in this book. Our top priority as we developed The Budget-Building Book for Nonprofits was to make it useful and relevant to readers at all levels of financial and budgeting experience. Nevertheless your own budgeting experience, professional background, and role in the budgeting process will determine how you can best use the book. To help you determine how your organization might use this workbook, we have included descriptions and tips on how readers in different situations might approach and benefit from The Budget-Building Book for Nonprofits. The CD that accompanies this book contains material you will find useful regardless of your background and budgeting experience. Many of the exhibits and worksheets in the book are available as spreadsheet files on this CD. In addition, the CMS Nonprofit Budget Builder, a Windows software application, is included for you to use as you implement the ideas in this book within your organization. If you are budgeting for a smaller nonprofit, especially one with just one or two programs, this book will be most valuable to senior staff, especially the executive director (or equivalent), the senior financial manager (whether salaried or volunteer), and the board members. Your organization can use The Budget-Building Book for Nonprofits to establish its entire budgeting process from beginning to end or to revitalize one it already has. This book may also be used to educate board members, especially new ones, on the board’s role in the budgeting process and how an effective budget is developed. Additionally, this book may be an excellent tool for

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educating newly hired financial personnel with primarily for-profit backgrounds and limited nonprofit experience. The CMS Nonprofit Budget Builder software (on the CD) is a good way to get started. If you are budgeting for a medium-sized nonprofit or one with multiple programs and sources of income, The Budget-Building Book for Nonprofits will be useful to senior executives and financial staff for modifying and improving the existing budgeting system. It may also be used to orient program and support department managers to budgeting techniques and can be especially helpful for managers new to the organization. As in the case of smaller nonprofits, The Budget-Building Book for Nonprofits is a practical tool for orienting both new board members and financial staff who are new to the nonprofit environment. If you are budgeting for a larger nonprofit, The Budget-Building Book for Nonprofits will enrich the budgeting process when it is used to educate program and support department managers about budgeting. This book will also be very useful for large nonprofits’ affiliates and chapters that are required to do their own budgeting but must conform to organization-wide budgeting standards. Furthermore, new financial staff and board members of larger nonprofits will benefit from using The Budget-Building Book for Nonprofits to orient themselves to the nonprofit budgeting process. If you are inexperienced in developing budgets or are unfamiliar with nonprofit budgeting, we recommend that you read The Budget-Building Book for Nonprofits in its entirety and in sequential order, starting with Part One, which contains important background information. After reading this part, use the diagnostic budgeting checklist in Chapter Seven to alert you to the places where you will find the specific information you require to develop your budget. We recommend that you then continue to read the book sequentially, paying particular attention to the sections you have highlighted in the checklist. As you read, make notes and jot down the book sections that you find especially helpful. Be sure to review the checklists, worksheets, and budget examples found throughout the book, especially in Part Three. When you are finished reading the book, use the diagnostic budgeting checklist, the annotated Contents, the tools on the accompanying CD, and your notes to direct you back to the materials you need for developing your budget. If you are experienced in developing nonprofit budgets, we recommend that you at least skim all the material in The Budget-Building Book for Nonprofits. You never know when you might find something that sparks a great new idea to use in your budgeting process. Otherwise, start at the diagnostic budgeting checklist in Chapter Seven to navigate to the information that will be most helpful to you. The checklist and the many cross-references throughout will refer you to the chapters and sections that have the material you need. You may also use the annotated Contents to find the specific information and tools you need for budget development.

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The Budget-Building Book for Nonprofits is also a good reference to turn to when a particular issue has stalled your budgeting process. Additionally, reviewing the exhibits and worksheets (especially those in Part Three) and the software on the CD might yield an especially useful budgeting or planning tool, which could save you the time of having to create this tool yourself. As you go through The Budget-Building Book for Nonprofits you will notice that many sections contain references to other chapters. We have included these crossreferences in recognition of the fact that budgeting is not a linear process; rather, it is one in which many aspects and elements are interconnected and interdependent. We think you will find these cross-references very useful in directing you to other relevant information. Additionally, each of the resources in Part Three has its own table of contents that lists the exhibits and worksheets that resource contains.

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Part One

Understanding Budgeting Basics

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Chapter 1

Why Budgets and Budgeting Are Important to Nonprofits MERRIAM-WEBSTER’S Collegiate Dictionary defines budget as 1. “A statement of the financial position of an administration for a definite period of time based on estimates of expenses during the period and proposals for financing them” 2. “A plan for the coordination of resources and expenses” 3. “The amount of money that is available for, required for, or assigned to a particular purpose” These are pretty long-winded definitions. In plain language, they mean:

r r r r r r

An effective budget is a plan For receiving and spending specific amounts of money In specific cost categories To get specific things done Within a set period of time With monitoring mechanisms built into the process.

There is an even shorter way of saying this: A budget is a plan for getting and spending money to reach specific goals by a certain time. A budget is a plan. The word plan in this sentence sounds solid and reassuring. In reality, however, most plans are only as good as the work and information that go into preparing them. Basically, a plan is

r r r r

A well thought-out idea of future actions Needed to achieve specific goals Within a set period of time, Based on past experience,

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r r

Accurate current information, And assumptions about the future (based on the best research possible).

This means that people who prepare budgets and plans must

r r r r

Set specific goals, Examine the past, present, and future, And identify the specific actions and costs Needed to reach the goals they set in the first place.

Four basic rules about budgets and plans are Rule 1. A budget is a plan for spending money to reach specific goals within a certain time period. Rule 2. Any budget or plan is only as good as the time, effort, and information people put into it. Good budget practices should foster collaboration and exchange of information among the budget team participants. Rule 3. No budget or plan is perfect because none of us can totally predict the future. Rule 4. In order to reach the goals, all budgets and plans must be monitored and changed as time goes on.

A. The Importance of Budgets and Budgeting Many nonprofits need budgets to get money in the first place. Government funders and foundations will generally not accept a grant application without a properly prepared budget. But even if a funding source or a donor is willing to provide funds when no budget exists, a well-managed nonprofit will still prepare a detailed budget for spending the money. Simply stated, the top economic priority of any nonprofit should be staying solvent, and budgeting is the optimum tool for promoting this goal. Finally, the more clear, accurate, and well thought out budgets are in the beginning, the more likely a nonprofit is to be able to

r r r r r

Adjust plans, activities, and spending as needed. Spend money cost effectively. Reach the specific goals it has set. Receive “clean” audits. Avoid incurring questioned or disallowed costs or cost overruns that it may have to pay for from other funds.

Well-prepared budgets have many other important benefits too. They let everyone in the organization know

r r r

The goals to be achieved The work to be done to reach the goals The resources (people and things) needed to get the work done

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The resources available for getting the work done The timetable and deadlines for getting specific work done The individuals responsible and accountable for doing the required work Budgets serve these additional functions for well-managed nonprofits: Budgets provide the financial and operational guidance management and staff need to implement board policies and directives. Budgets allow management to measure and guide current and long-term financial health and operational effectiveness. Budgets guide the acquisition and use of resources. Budgets anticipate operational expenses and identify income to pay for such expenses. Budgets are tools for controlling spending and avoiding deficits. Budgets help integrate administrative, staff, and operating activities. Budgets allow management to monitor actual income and expenses, comparing them to the amounts budgeted, assessing the nonprofit’s overall financial situation, and altering plans as needed. Budgets can serve as the basis for performance reviews and, in some cases, compensation criteria.

B. The Basic Characteristics of Budgeting Effective budgeting is thoughtful and deliberate. It involves carefully setting goals and developing plans and also creating a logical and informed process for allocating resources. Budgeting is inclusive. It brings together the perspectives and interests of a wide variety of stakeholders: the board, clients, management, staff, volunteers, prospective donors and income sources, and the general public. At the outset of the budget process, input from all relevant parties is sought. Dissemination of the approved budget should clearly and effectively communicate priorities, goals, and operational plans to the entire organization as well as to other stakeholders. Finally, budgeting is an ongoing process. It does not occur in a vacuum or for a limited period, producing a document that gathers dust on a shelf. Ongoing monitoring, data gathering, analysis, revision of projections and assumptions, and consideration of alternatives are needed. Over time, careful attention to the budgeting process will lead to greater financial stability, operational effectiveness and efficiency, and responsiveness to organizational needs and priorities.

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Chapter 2

Understanding Basic Types of Nonprofit Budgets Overview GENERALLY, NONPROFITS BENEFIT from using six types of budgets: 1. 2. 3. 4. 5. 6.

Total, organization-wide operating budgets Operating budgets for individual programs, units, or activities Capital budgets Cash flow budgets (also called cash flow projections) Opportunity budgets Zero-based budgets

A. Organization-Wide Operating Budgets Nonprofits with multiple programs or units are most likely to need an organizationwide operating budget. Such budgets identify all the income and expenses anticipated to be needed for the entire organization’s operations during the coming year. An organization-wide operating budget should include all the costs for employees, consultants, programs, services, facilities, and other elements needed to organize, carry out, and evaluate the organization’s total administration, units, programs, and activities. To establish and maintain an organization-wide operating budget, nonprofit managers need to spell out the budgeting cycle, budgeting responsibilities, and a detailed schedule or budget calendar. In addition, the board should adopt written budgeting policies to guide the overall process. Usually these policies also describe the economic framework for the budget (for example, they may set a standard for the estimated rate of inflation to be used in computing budget amounts). The size and complexity of a nonprofit determine to what extent its organization-wide budget will resemble a pyramid, with each succeeding level

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representing a consolidation of several budgeting units, or cost centers. For example, the lowest level of the pyramid in a large nonprofit’s budget may comprise individual program and activity budgets. The second level will include consolidations of the program and activities for each unit into unit budgets, each of which will also include the budget details for the functioning of the unit itself. The third level may consolidate all the unit budgets into department or division budgets, each of which will also include the budget details for the functioning of the department itself. Finally, the organization-wide budget tops the pyramid; it contains all the department or division budgets and the highest-level organizational budget details. A small nonprofit without multiple units or departments may present the budget of its one program or activity as its organization-wide budget (assuming it has only one program or activity). However, if it consolidates several unit or program or activity budgets into an organization-wide budget, each program or activity budget must include a justifiable allocation of the organization’s overhead and central administrative costs. The reason for this is that the individual programs serve as cost centers (that is, primary fiscal units) in small nonprofits, and each program budget would be understated if it did not account for that program’s share of the general overhead. For a sample organization-wide expense budget, see Exhibit E.1 in Resource E. For more detailed information on creating organization-wide operating budgets, see Chapters Six and Twelve.

B. Operating Budgets for Individual Programs, Units, or Activities Each of a nonprofit’s individual programs or activities usually requires its own specific budget, both to gain support from outside donors and other funding sources and to provide necessary budgetary controls. Such individual operating budgets will also help to build the total, organization-wide operating budget. An operating budget for an individual program, unit, or activity should allow for all the employees, consultants, services, facilities, and other elements needed to organize, carry out, and evaluate operations of a specific program, unit, or activity. Small nonprofits that operate a single program or have a single purpose—as day-care centers often do, for example—may find they need to create only one program or unit budget, which encompasses the entire organization’s operations. For examples in worksheet form of program or unit operating budgets, see Resource B. See Chapter Thirteen for a more detailed discussion.

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C. Capital Budgets Capital budgets are tools that nonprofits may use to help themselves plan and manage capital projects, those requiring relatively large, one-time expenditures. In many cases, capital projects require funding for more than one fiscal year, a time frame that will have to be reflected in capital budgeting. Basically, there are two sorts of capital projects: capital improvement projects (used to buy, construct, or extensively renovate physical facilities) and capital equipment projects (used to acquire expensive equipment for long-term use). The following are definitions a nonprofit may use in the capital budgeting process: 1. Capital projects are major, nonrecurring expenditures that are required to support r The purchase, construction, or renovation of physical facilities r The purchase or design of major equipment or systems 2. Capital improvement projects involve the construction or major renovation of a building or other facility. Typically, a capital improvement project has r A useful life of more than one year r A value that is over a specified total dollar cost (for example, $5,000, $10,000, or some other amount) that is set by a funding source or the nonprofit 3. Capital equipment projects involve the purchase of equipment and the services required to make it operational. Capital equipment purchases generally have r A useful life of more than one year r A specified value (for example, more than $2,500, $5,000, or some other amount) established by a funding source or the nonprofit The capital budgeting process is primarily concerned with finding the best means of financing capital projects, such as issuing bonds, long-term borrowing, selling other assets (investments), or conducting a fundraising campaign focused on capital needs. For examples of a capital budget, see Chapter Nineteen, which discusses this subject in more detail, and Worksheets B.7 and B.8 in Resource B.

D. Cash Flow Budgets (Cash Flow Forecasts) Cash flow budgeting is essential to the day-to-day and long-term fiscal health of every nonprofit. There is often a delay between the time an organization “earns” its revenue and the time it is able to collect the cash from the revenues earned. In a similar manner the costs associated with running an organization are not always paid when the expenses are incurred. Cash flow budgets require organizations to

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project and describe the schedule, nature, and amount of revenues to be received and expenses to be disbursed. Planning for cash flow management has the same level of importance in a nonprofit organization as overall organization-wide budgeting does. Failure to manage cash flow properly can cause severe operational problems. Stated simply, cash flow is the difference between the amount of actual cash coming into an organization from support and revenue, such as dues, grants, and fundraising, and the amount of actual cash going out of an organization in the form of expenditures, such as salaries, rent, office supplies, loan payments, mortgage payments, and other payments. Unfortunately, cash flow analysis is often overlooked by nonprofit organizations until there is not enough cash available to meet outstanding obligations. Difficulties in cash flow management often result when receipts lag behind expenditures. For example, some nonprofit organizations are not reimbursed by their funding sources for services rendered until long after the fact. In order to provide these services, expenditures for staff, office space, equipment, supplies, and so forth must often be disbursed before reimbursement is expected to arrive. To deal with this problem, a nonprofit organization must perform proper cash flow planning. Cash flow budgets project payments (disbursements) and cash received (receipts) month by month over the course of the fiscal year or other period, focusing on the timing of these transactions. A cash flow budget highlights times when gaps are likely to occur, with projected disbursements likely exceeding cash then on hand (a situation referred to as negative cash flow). A cash flow budget will also show periods when idle cash will be available for investment (referred to as positive cash flow). In the case of projected cash shortfalls, a complete cash flow analysis will go one step further by identifying how the shortfall can be avoided so programs can continue without interruption. Proper cash flow planning requires the preparation of a cash flow projection, which serves as an early-warning device to keep cash reserves from becoming too low to meet cash needs. For more information on cash flow projection, planning, and troubleshooting, as well as an example of a cash flow budget, see Chapter Twenty-Two as well as Chapter Eight, Section D, and Chapter Twenty-Three, Section D.

E. Opportunity Budgets Opportunity budgeting, a term used by Peter F. Drucker in Managing in Turbulent Times (HarperCollins, 1980), describes a budgeting process that, ideally, is used when all the other types of budgets previously described in this chapter have

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been developed effectively. Organizations use this process to plan for and examine opportunities to do something new and different and to select those most likely to yield the most positive results. For example, an organization interested in opportunity budgeting would prepare an analysis or projection of various possibilities for expansion that would further its mission or improve its operations. Then, when it became possible to budget for revenue surpluses (or when surplus revenue unexpectedly materializes), the organization would have all the relevant information and research on hand to make the best decisions about using the revenue as opportunities present themselves. Thus, developing an opportunity budget allows the organization to take advantage of any situation that may result in better fulfillment of an organizational goal or objective. In order to reap the benefits of an opportunity budget, an organization must have sound budgeting practices; clear, efficient, and realistic planning; and wellconceived strategic goals. These three elements will allow the organization to seek opportunities for expansion—and to budget for them—with the confidence that the structures, resources, and practical considerations for doing so are in evidence. Of course there is always an inherent risk in expansion, but when expansion is part of a well thought-out and timely move, it can reinvent an organization. Actively researching and looking for opportunities that an organization can economically support is one of the most effective growth-promoting tools. Drucker’s Managing for Results (HarperCollins, 1964, 2006) contains many examples of identifying opportunities successfully. It is a good idea to create opportunity budgets as a part of your ongoing budgeting process. Create at least one opportunity budget each year. If your organization is having a year when revenue exceeds expenses, then you will be able to implement the opportunity budget swiftly because you will have already done the needed planning.

F. Zero-Based Budgets Most budgeting techniques begin with the assumption that the activity being budgeted is necessary and that the manner in which the activity is being conducted is the best way to get the job done. Zero-based budgeting rejects those assumptions. Zero-based budgeting describes the budgeting process that requires that every assumption of a budget be justified, not only as to its cost but also as to its effectiveness in contributing to the goal of the activity. In essence, you completely ignore the prior year’s budget and build a new budget item by item, from the ground up. Your analysis might lead your organization to completely eliminate the program or unit being evaluated or to completely redesign the methodology used to accomplish the program’s goals.

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The idea of zero-based budgeting has been discussed in periodicals and books for over forty years. Governments, businesses, and some nonprofit organizations have attempted to use this budgeting tool during that time. It has not been widely adopted because it is a labor-intensive, difficult process that often rejects the status quo and recommends institutional change. It requires a careful study of alternative ways to perform a particular task or operate a program. For example, an organization trying to prepare a zero-based budget might want to study the cost of running a program with its own staff versus the cost of outsourcing a portion of the work or even the entire program to another entity. Zero-based budgeting can lead to radical change in an organization. This process might lead management to decide to stop a program that turns out to be no longer necessary. This program might be replaced with a new program operating in a completely different manner, or the organization might decide to cease that particular activity altogether. From this discussion, the reader can readily ascertain that zero-based budgeting is not for the faint of heart. Some hard and potentially difficult decisions need to be made and then “sold” to the organization’s board, staff, clients, and stakeholders. Few managers or board members understand the principles of zero-based budgeting and fewer may want to tackle the task of creating such a budget. Chapter Eighteen discusses the topic in more detail. Effective planning is the key to successfully creating a zero-based budget. Although zero-based budgeting techniques will never replace traditional budgeting principles, they do have their place. The information presented in Chapter Eighteen should help more organizations to better understand and accept the challenges of creating these budgets when they are needed.

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Chapter 3

Key Board and Staff Roles and Responsibilities in Nonprofit Budgeting THE ROLES DIFFERENT PEOPLE play in budgeting generally depend on a nonprofit’s size, structure, and income sources. In general, budgets are best developed collaboratively, using the skills and knowledge of people at a number of levels. However, because creating a budget may touch on sensitive or confidential issues, individuals involved in the budgeting process need to know what is expected of them. The following discussion of some roles that people in various positions in the organization may play in the budgeting process is just one model for budgeting roles; many variations of this model are used successfully by organizations. Whatever division of responsibility is used, the basic requirement is to have and follow a specified process, tailored to the organization and its budgeting goals. Budgeting roles and responsibilities should be spelled out in written policies and procedures, which should be kept up to date and understood by those involved. It is important that an orientation and training session be held annually for all members of the budget preparation team. This will refresh the memories of veteran budget team members and orient new team members. The training should carefully walk through the entire budget process. Use this book to create your training agenda and materials, and include a copy of the book with every budget planning package.

A. The Board’s Role The board’s role can vary according to its members’ willingness and ability to commit time and effort to budgeting. Some boards are deeply involved and participate in planning the annual budget strategy and guidelines, analyzing draft budgets, and giving final approval. Other boards may rely more on management, effectively

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restricting their role to budget review and approval. Additionally, boards may designate a finance or budget committee with the specific responsibility of working on the budget. Overall, the board is legally responsible for ensuring that budgets meet applicable laws and regulations, are fiscally sound, and will further the nonprofit’s tax-exempt purpose. In larger nonprofits this generally means 1. Developing and reviewing the nonprofit’s mission statement and its specific goals and activities for achieving the mission. 2. Creating a statement of strategic program and service priorities to guide resource and allocation decisions during the budget process. 3. Establishing general budget policies, such as r Requirements for a balanced budget r Policies on the use of cash reserves r Decisions about salary increases, hiring, layoffs, new programs, capital projects, and major fundraising efforts or capital campaigns r Decisions concerning the need for a zero-based budgeting analysis for one or more programs or activities 4. Formally reviewing and approving the budget. 5. Regularly reviewing financial and narrative reports on budget implementation and planning for any needed corrective action. A standard tool to use is a financial report that presents each line item in a budget versus actual format. (If possible this review should include a comparison against external or competitive benchmarks as well. For example, a child-care organization should ascertain what it costs similar organizations to feed a child in day care for one week to determine the accuracy of this budgeted item. Or an organization might want to review its occupancy costs to determine if the rent it is paying is in line with that for other possible office locations.) Of course an individual board may wish to do more (or less) in the budget development process. Working with and through the chief executive officer or executive director, a board could do the following: 1. Help evaluate current programs, assess needs for new programs or services, and develop long-range financial forecasts and operating plans. 2. Establish draft budget guidelines by setting expense and income targets for the nonprofit as a whole or for specific departments or programs. 3. Establish guidelines or formats for the budget document itself. 4. Hold budget information sessions for clients, staff, or contributors. 5. Create a working group to study the budget proposed by staff, and recommend modifications to the full board.

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B. Executive Director’s, President’s, or CEO’s Role A nonprofit’s executive director (ED), president, or chief executive officer (CEO) plays a sustained role in the budget process, usually being responsible for 1. 2. 3. 4. 5.

Arranging and staffing any early strategic planning sessions with the board Preparing options and recommendations to guide budget development Ensuring that the budgeting schedule is met Reviewing draft budgets and making resource allocation decisions Presenting the recommended budget to the board, explaining its provisions and possible consequences, and answering board questions

Depending on the size of the nonprofit and its staff, the ED or president or CEO may delegate many budgeting tasks to the chief financial officer (CFO) or other managers. However, the CEO is always responsible for ensuring that the budget is accurate, adheres to board policies, and is submitted on time for board review and approval. Once the budget has been approved, the top executive in the organization is responsible for working with the CFO to implement it, which involves 1. Communicating the approved budget to management and line staff so they clearly understand it 2. Conducting regular financial monitoring to compare actual income and expenses to those budgeted 3. Reviewing financial reports to determine what caused any variances and to correct deviations from the budget Finally, the CEO is responsible for communicating the results of financial monitoring and corrective action to the board and for seeking its input and approval for needed fiscal or program changes.

C. Chief Financial Officer’s Role The CFO plays a major and sustained role, often having day-to-day responsibility for coordinating budget development, implementation, and monitoring. Typically, the CFO’s assignments include 1. Creating a budget development calendar and ensures that deadlines are met 2. Communicating budgeting policies and procedures to managers and line staff 3. Establishing the format for draft budgets 4. Developing income and expense forecasts based on reviews of external economic and competitive trends, when applicable

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5. Collaborating in setting expense and income targets in line with strategic plans for programs or units 6. Evaluating draft budgets from program or unit managers for accuracy, reasonableness, applicable guidelines, and anticipated resources 7. Discussing draft budgets with the CEO and other managers as needed 8. Writing up recommendations for reducing, increasing, or reallocating requested resources 9. Usually, preparing the budget document once the CEO’s budget decisions are made and possibly helping to present the budget to the board After the budget is approved, the CFO often is responsible for implementing financial monitoring, including preparing and analyzing budgeted versus actual income and expense reports for management and board use and overseeing any corrective actions needed. Organizations without a formal CFO must have a strategy for assigning these tasks and responsibilities to a qualified individual or individuals. Likely candidates will include board members and outside consultants.

D. Program, Unit, or Activity Manager’s Role The involvement of program, unit, or activity managers is essential to developing budgets that accurately reflect reality. Program managers are often best equipped to provide information on current program needs and the costs and effects of reducing or expanding their individual operations. They may also be able to supply the most relevant information when developing budgets for new programs or activities. Ideally, program and unit managers are responsible for developing draft budgets for their areas, which can mean consulting other staff to evaluate current or new programs, operating costs, and staff and equipment needs. When it comes to carrying out budgets, program and unit managers often are best placed to make resource allocation decisions or recommend changes in activities to meet budgeted expense or income targets. Program or unit managers may also be responsible for assessing the costs of continuing or expanding current programs, of creating new programs, or of making modifications to conform to budget policies. In addition, they may meet with the CFO or CEO to review draft budgets and explore options for change. After the CFO informs program and unit managers about approved program budgets, they in turn inform staff about any budget or operational changes. They also review regular financial reports prepared by the CFO, monitor income and expenses, and help develop and implement corrective action plans for their specific areas of responsibility.

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A major weakness of some budget teams is that program managers are not team participants. Program managers should always be included. If you do not include them, you may severely impair the quality of the budgets prepared without their participation, and you also lose the ability to hold them accountable for budgets that are inaccurate. One common reason for excluding program managers from the budgeting process is the confidentiality and sensitivity of the wage and salary line items. It is important to realize that properly trained managers will handle this information responsibly; your budget training sessions should educate the members of the team about the organization’s standards and policies and procedures in this area.

E. Department Manager’s Role Department managers (such as the heads of human resources, development and fundraising, information systems, and facilities) have budgeting roles comparable to those of program and unit managers. Because department managers are most familiar with the operations they oversee, they are in a good position to develop budgets for their areas of responsibility, often with the support of others in their units.

F. Other Possible Participants Depending on the nature of the organization and its management style, a number of others may be involved in budgeting. Here are some examples:

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Clerical support staff, to prepare various documents and materials throughout the budgeting process; they should also understand what is expected in terms of tasks, formats, workloads, and schedules. Consultants and outside specialists, such as independent auditors and accountants, architects, engineers, bond counsel, and specialists in program areas, all of whom need to know their roles and timetables. Due to the Public Company Accounting Reform and Investor Protection Act of 2002 (better known as the Sarbanes-Oxley Act), the Government Accountability Office’s Government Auditing Standards (better known as the GAO Yellow Book), and in some cases state legislation as well, your auditor has a more restricted role than in the past but still should be asked for assistance when appropriate. Selected clients and volunteers, who often can provide ideas to improve budgets (and whose involvement may be required by certain funding sources). Individuals working in an information systems department, who may be called on to do special analyses quickly.

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Chapter 4

Establishing Budget Guidelines, Priorities, and Goals ESTABLISHING GUIDELINES, identifying priorities, and setting goals are crucial and frequently overlooked budgeting steps in which the board, president or CEO, and CFO create the overall context for the coming year’s budgeting process. They review the nonprofit’s mission, current fiscal status, and projected income and expenses for the coming year. Nonprofits with long-range financial plans usually update them at this time, using current information to project fiscal and program trends likely to affect operations. Based on their review and the specific budget development strategy they have chosen, the board, CEO, and CFO then set organization-wide operating budget goals for income and expenses for the coming year. The goals they set will be used to guide the development of the coming year’s organization-wide operating budget as well as individual program and unit operating budgets.

A. Establishing Guidelines The board of directors, the CEO, and the CFO often all participate in establishing policies and guidelines for developing the coming year’s budget, including matters related to

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Specific program objectives and priorities Income and expense targets or limits Policies governing the creation of new programs or positions Guidelines for existing personnel costs, such as wage increases and fringe benefit rates

Direction to the budget planning team about shifting program objectives and priorities should come from the top. These objectives and priorities might reveal

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the need to close or downsize programs or other aspects of the organization’s operations that are no longer necessary. Changes in demographics or needs in the nonprofit’s service area are important factors in determining what programs are effective. Populations change and needs change over the years. For example, it is possible that a program originally designed to help immigrants is no longer needed and that a program designed for the teenagers in the community would be a better use of the organization’s resources.

B. Identifying Priorities Effectively identifying priorities is contingent on a thorough understanding of the organization’s up-to-date and clearly defined mission statement. An accurate mission statement is necessary for guiding programs, especially during planning and budgeting activities, because it summarizes the organization’s basic purposes and primary reason for existence. A good mission statement can help the organization do such important things as

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Set clear organizational and program goals. Make sure current and proposed programs and activities are appropriate. Focus resources productively. Determine the specific activities and expenditures that should be maintained and the ones that should be reduced or eliminated.

Reviewing the mission statement should be the first step in determining organization and program priorities. The next step might include examinations of the demographics of the service area; the specific, realistic needs of clients; and the actual response to existing programs. Assessing existing programs (and any service gap or problem that becomes evident) in light of the findings from these examinations will provide important information for the identification of priorities. For example, if it becomes clear that a certain program seems to meet community needs perfectly yet has an unexpectedly low rate of use and little community support, a budget priority might be to conduct research to determine the cause of this situation.

C. Setting Organization-Wide Goals The board, CEO, and CFO work together to set total organization-wide goals. These goals can then be translated into equivalent operating income and expense goals

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to be used in the budgeting process. The board, CEO, and CFO determine the following:

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The total amount of income the organization as a whole expects to earn during the coming year The total amount the organization as a whole expects to spend to carry out all its activities during the coming year

Total operating income and total operating expenses should generally match. If organization-wide expense goals exceed income goals, meaning that anticipated expenses will exceed anticipated income, then the board, CEO, and CFO have the following options:

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Increase income or reduce projected expenses, or do both. Be prepared to take corrective action later (such as cutting budgeted costs or generating additional income). Formally decide to use funds from the organization’s unrestricted funds to make up the difference. Take the risk of operating at a deficit during the coming year. We do not recommend this choice unless adequate reserve funds would exist even after the deficit year. Occasionally an organization will have a special fundraising event or other occurrence that generates a large surplus in one year. With careful budgeting the organization may decide to spend some of that surplus in a year where fundraising was less successful. Unfortunately some organizations do not understand this rule and run deficits until bankruptcy occurs.

If organization-wide income projections exceed expense projections, meaning that estimated income is more than estimated expenses, then the board, CEO, and CFO have the following options:

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Adjust the total operating income and expense projections so they match. Let the surplus stand as a hedge against unexpected costs during the coming year. Designate the surplus for future use as needed.

Your organization should always try to create a budget resulting in a surplus. This protects your organization in two ways. First, if your income estimates for a year are not met, your deficit will be smaller than it would have been otherwise. Second, if you meet your budget goals, you will be generating funds for future expansion or new programs. Another suggested budgeting technique is to include a line item for contingencies in every budget. Emergencies and other events (such as large gasoline price increases) can occur without much advance notice. If you

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have a “contingent” budget line item, you can better withstand these unexpected yet frequent surprises.

D. Setting Individual Program and Unit Goals At this point in the planning process a decision may be made to analyze one or more programs and activities in accordance with zero-based budgeting concepts. The CFO and CEO should work with the managers of each individual program and unit to set program and unit income and expense projections for the coming year, based on the organization-wide income and expense projections and on an analysis of the number and characteristics of the services to be provided by the program. In turn, each program and unit manager should use individual program and unit income and expense projections to guide planning for the nature, the staffing, and the outcome goals of the specific program or unit (and for the lineitem detail in the program or unit operating budget). Total anticipated operating income and expenses for each individual program or unit should match. If they do not match, plans for alternative income generation must be developed or expenses must be cut, or both approaches may be necessary. Developing the discipline and knowledge to perform these steps can make a big difference in the future financial health of the organization.

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Chapter 5

How Different Sources and Types of Income Can Affect Budgeting SOURCES AND TYPES of income may affect a nonprofit’s budgets and budgeting processes far more than those of a commercial organization.

A. Unrestricted Funds Unrestricted funds are monies whose use is not restricted to specific purposes by the contributor or funding source. Therefore

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These funds may be budgeted for uses and time periods largely at the nonprofit’s discretion. They may be assigned to any budget category or line item, using any budget category or line-item titles or definitions. They may be reassigned, with budget modifications made according to the nonprofit’s internal policies and procedures.

B. Contract or Grant Agreement Funds Income accompanied by a contract or grant agreement often carries the following conditions:

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The use of funds may be restricted to specific purposes, which are spelled out or referred to in the contract or grant agreement. People served by the funded program or activity may have to meet specific eligibility requirements. Specific budget category and line-item titles and definitions may have to be used. Matching requirements may exist in the grant contract, as discussed in Section G.

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Budget flexibility or the time period, or both, for expenses may be limited. Specific procedures and funding source approvals may be required to modify the budget. Compliance with the requirements may be subject to audit.

Government grants are frequently cost reimbursement grants. This means that the organization must first incur the expense before claiming the income from the grant. If any amount of the grant is not spent within the grant’s duration, then that money usually needs to be returned to the grant provider. Therefore the timing of eligible grant expenditures is crucial to effective financial management and budgeting.

C. Restricted Contributions Contributions may also have their uses restricted by a donor or funding source, either orally or in writing. Such contributions may carry restrictions similar to those provided under contract or grant agreements. Accounting standards require that funds donated with restrictions attached to their use be designated as temporarily restricted net assets until the restriction is either met or removed. The organization must recognize that restrictions exist and separately track the net assets until they are used according to the restrictions. Funds donated for a particular reason are defined as having a purpose restriction, and the funds are classified as temporarily restricted net assets until they are spent for the specified purpose. Similarly, a donor might specify that the contribution must be used in a particular year. This is a time restriction, and the funds are classified as temporarily restricted net assets in periods prior to the specified year. It is important for you to understand that these designations may exist as you prepare and manage your budget. For example, money donated by individuals for a specific purpose, such as purchasing a new vehicle or adding a classroom, would fall into this category until the funds are expended. Funds raised by a group of donors for a particular purpose, such as building a new structure, would also be considered temporarily restricted net assets.

D. Income from Trade or Business Activities Income from a trade or business activity carried on by a nonprofit has the following potential consequences:

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Income fluctuations may reduce budget accuracy. Budgeted-to-actual income comparisons may have to be made more often. Income shortfalls may require budgets to be updated more frequently.

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How Different Sources and Types of Income Can Affect Budgeting

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If unrelated business income (UBI) is generated, the nonprofit may have to budget estimated unrelated business income tax (UBIT) payments. (Unrelated business income is subject to the corporate income tax rate. The determination of what constitutes unrelated business income is based on the mission of the organization. It is a good idea to consult with a tax adviser for assistance with this complex subject.)

E. Asset-Generated Income Revenue generated from a nonprofit’s existing assets (investment or rental income, for example) may have the same effects on budgets and budgeting as income from trade or business activities does. Nonprofits must devote particular attention to this budgeting area to ensure proper segregation of income and expenses by the source of the funds used to generate them. Specifically, there must be separate accounting designations for income generated from endowment funds (and from any investments made with these funds) and income generated from funds other than endowment funds. Many states have laws spelling out in detail the requirements for specific identification of income streams or monies meeting the endowment criteria of a specific jurisdiction. Officers, staff, and board members of an organization can be held accountable for diversion of endowment principal and income earned on endowment funds.

F. Cash and Noncash Contributions, Including Pledges Income from cash and noncash contributions, including promises to give (commonly referred to as pledges), can have the following effects:

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Income fluctuations may reduce budget accuracy. Budgeted-to-actual income comparisons may have to be made more often. Income shortfalls may require budgets to be updated more frequently.

Pledge collections are not always dependable; some pledges are never collected, and the timing of the receipts is a big factor to consider, particularly when constructing a cash flow forecast.

G. Funds Requiring a Cash or In-Kind Match A cash matching share is exactly what it says: a nonprofit will receive a specific dollar amount of funds from a funding source if it is able to provide a specific (matching) dollar amount of funding from an additional source to support the

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The Budget-Building Book for Nonprofits

program or activity in question. A noncash or in-kind matching share means that instead of providing money, the nonprofit provides from other sources goods, facilities, services, or equipment worth a specified amount to the support of the program. A combined cash and in-kind matching share may also be required. Having a funding source that requires the nonprofit to put up a program matching share can often mean the following:

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The nature, amount, and sources of the matching share must be included in the budget. The method of determining the value of a noncash matching share must be described. The required matching share must actually be provided and properly documented in the accounting records. The nonprofit’s compliance with the matching requirements can be subject to audit.

In addition, the IRS has its own income and expense definitions with which nonprofits should become familiar early in the budgeting process.

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Chapter 6

Strategies for Developing Organization-Wide Operating Budgets EFFECTIVE BUDGET DEVELOPMENT depends on having clearly defined strategies for the budgeting process. In preparing organization-wide budgets for the coming fiscal year, multiunit nonprofits often must adjust individual units’ draft budgets to align them with anticipated resources for the organization as a whole. Nonprofits that clearly define their budget development strategies and communicate them to unit and program heads can build wide support for budget decisions and avoid time-consuming conflicts and adjustments in the future. Unclear or uncontrolled budget development is likely to create problems. This chapter presents four strategies organizations can use to increase the accuracy and efficiency of their budget development: Strategy 1. Set annual organization outcome goals from the top down to guide development of draft program and unit budgets. Strategy 2. Set annual income and expense targets from the top down to guide development of draft program and unit budgets. Strategy 3. Request that unit and program heads submit draft budgets that show priorities for increased, decreased, and unchanged total budget amounts. Strategy 4. Use zero-based budgeting. The first two strategies favor top-down approaches to budget development and thus tend to limit program or unit heads’ input. The second two strategies emphasize bottom-up approaches and thus tend to provide program and unit managers with more input. Each strategy has strengths and weaknesses, and elements of each can be combined to suit an organization’s needs and style. The sections that follow discuss each of these four strategies and provide worksheets to guide strategy planning and use.

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A. Strategy 1: Set Annual Organization Outcome Goals from the Top Down The strategy of setting annual organization outcome goals from the top down calls for top management to consult with program and unit managers and appropriate staff before any initial draft budgets are developed. Defining the overall organization’s and specific programs’ measurable outcome goals in advance means that managers and board members can make sure (1) that specific draft budgets and plans for the coming year support and further the established outcome goals and (2) that everyone involved has a clear understanding of what needs to be done. Top management must assess the resources that will be available for the next fiscal year, basing this assessment on the most recent income and expense figures and projections as well as the outcome goals for the coming year. (The outcome goals may apply to the nonprofit as a whole or to individual programs or activities.) To be effective, the outcome goals must be both specific and measurable. Many nonprofits require quantifiable performance measures or performance indicators that will demonstrate achievement of specific outcome goals. Here are some examples of outcome goals and performance measures: Sample Outcome Goals 1. Increase the number of weatherized owner-occupied housing units from 350 to 475 over a twelve-month period. 2. Reduce the average per unit monthly heating cost by 5 percent. 3. Develop and implement a model employment skills training program by June 1 of the next fiscal year. 4. Provide training in the next twelve months to 250 low-income unemployed persons to improve their chances of job placement. 5. Place at least 65 percent of the target population in full-time jobs within two months of completing training. Sample Performance Measures for These Outcome Goals 1. The actual number of housing units weatherized. 2. Actual reductions in monthly heating costs, determined by comparing heating bills for the same month in different years—the year before and the year after services were provided. 3. Implementation of the program by the specified date. 4. Number of clients enrolled in and completing training. 5. Number of clients employed two months after training. With this strategy the specified outcome goals become the basis on which program or unit managers develop their draft budgets. Outcome goals and

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performance measures also contribute to the coming year’s overall operating plan, providing a clear statement of what the overall organization intends to achieve and how results will be measured. Use Worksheet 6.1 to plan when and how to carry out this top-down strategy. After finishing the tasks in the worksheet, those managing the budgeting process must follow through by taking the actions listed on page 28.

WORKSHEET 6.1 Setting Annual Top-Down Organization Outcome Goals to Guide the Development of Draft Program and Unit Budgets 1. List top management’s initial ideas for the coming year’s outcome goals. (Consult the organization’s written mission statement in developing these ideas.)

2. List when and how top management will present the initial ideas for outcome goals to program and unit managers.

3. List when top management will discuss the outcome goals with program and unit managers and get input from these managers. (Gain input before deciding on final recommendations to the board, so as to get additional viewpoints, speed buy-in, and unite everyone behind final decisions.)

4. After discussion with and input from program and unit heads, list top management’s revised recommendations to the board for the coming year’s organization outcome goals. (State desired outcome goals clearly and specifically and in order of priority.)

5. List the organization’s final, board-approved outcome goals for the coming year. (State the final outcome goals clearly and specifically and in order of priority.)

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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1. Include the year’s board-approved goals in the package for developing draft budgets that is distributed to applicable unit heads. 2. Obtain a brief narrative from each unit head explaining how continuing activities, new initiatives, or proposed changes in his or her draft budget will contribute to the nonprofit’s overall goals for the coming year. 3. Ensure that in deciding on the final budget, top management and board members use these narrative explanations about each draft budget to help assess each budget’s potential merits and contributions to the nonprofit’s goals for the coming year.

B. Strategy 2: Set Annual Income and Expense Targets from the Top Down Under this top-down budget development strategy, top management first sets expense and income targets for the coming year for the organization as a whole and for each individual unit. In this way, units know in advance the income that is available (and the income they are expected to generate) during the coming year. Then each unit can develop a draft budget based on these income and expense targets. Use the checklist in Worksheet 6.2 to plan when and how to carry out this top-down strategy.

C. Strategy 3: Request Draft Budgets That Show Priorities from Program or Unit Heads This strategy calls for each unit head to prepare three draft budgets for the coming year, employing a range of percentage variations determined by top management and the board. There are three steps: Step 1. Top management decides what the percentage of variation should be among totals for the three draft budgets. For instance, the first may be unchanged from this year’s totals, the second may be 3 percent higher, and the third may be 3 percent lower. (In any given year, all three draft budgets may reflect differing rates of decreases, or increases, or whatever combination top management and the board call for.) This percentage change is usually specified for category totals; the unit heads will have significant input on the changes in each budget line item. Step 2. Each unit head prepares the three draft budgets to reflect the unit’s priorities and includes a brief summary in each draft budget of the likely impact the specific changes will have on the unit’s operations.

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WORKSHEET 6.2 Checklist for Setting Annual Top-Down Income and Expense Targets to Guide the Development of Draft Program and Unit Budgets  1. Top management forms a working group.

 2. The working group creates a. Reasonably reliable projections of unavoidable expenses (that is, bare-bones estimates) and of desirable or hoped-for expense increases for the organization as a whole b. Projections of income fairly certain to be received and of income likely to be received, again for the entire organization

 3. The working group summarizes the fiscal position of the nonprofit as a whole for the next year, using the group’s expense and income projections as a basis.

 4. The working group recommends expense and income targets for all programs, units, and activities, basing these targets on estimated resources and expenses.

 5. Top management reviews the working group’s assumptions, calculations, and targets; makes changes as appropriate; and submits them to the board. (Having the board approve income and expense targets can reduce the potential for conflict among managers.)

 6. Top management clearly communicates board-approved income and expense targets to managers and program and unit heads in the package of information on developing draft budgets.

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Step 3. Top management and the board adjust each unit’s draft budget up or down, depending on the most up-to-date understanding of the coming year’s income and expenses and informed by each unit’s perspective on change.

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The budget team should use Worksheet 6.3 as it plans, introduces, coordinates, and monitors the use of this approach.

WORKSHEET 6.3 Setting Percentage Variations for Program and Unit Heads to Use When Preparing Draft Budgets Showing Priorities for Increased, Decreased, and Unchanged Total Budget Amounts List the percentage variations from this year’s unit budget total that top management has decided each program or unit head must include in the three draft budgets for the coming year: Budget 1: A total of percent more than this year’s unit budget Budget 2: A total of

percent less than this year’s unit budget

Budget 3: The same total amount as this year’s unit budget Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

D. Strategy 4: Use Zero-Based Budgeting Zero-based budgeting (ZBB) focuses on the thorough reevaluation of each of an organization’s programs, units, and activities to determine if it should be continued (and if so, how) and included in the next budget. The ZBB process requires that management justify the existence of every facet of the organization; essentially, the ZBB has no built-in assumptions or automatically included items. Those using ZBB are starting the budgeting process from zero (as opposed to using budget figures from the past to build on in creating the next budget). Another way to think of ZBB is that the process demands an answer to the question: “If this product (activity or unit) were not here today, would we start it? If the answer is ‘No’, then the question should be asked: ‘Should we continue, and why?’” (Peter F. Drucker, Managing for Results, HarperCollins, 1964, 2006). Managers must address more specific questions as well when beginning a ZBB process. Here are some examples: 1. Should a given program, activity, or position be continued, or would other activities be more important or appropriate? 2. If the program, activity, or position is justified, should it continue operating in the same manner, or should it be modified? 3. If modified, how will it be modified, when, and by whom? 4. How much should the organization spend on the program, activity, or position being studied?

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The next step in ZBB is to require every segment of the operating unit to do the following: 1. Identify the major functions or activities it performs. 2. Answer the four specific questions just given, as they pertain to the operating unit. 3. Create alternatives or options based on the answers to the questions. 4. Project anticipated revenues and costs related to each option or alternative. Exploring and answering these four questions can lead management to the following options:

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Abandon the specific unit, program, or activity, perhaps in favor of other options thought to be more effective. Change, strengthen, simplify, redirect, reorganize, outsource, or otherwise change the existing effort. Make no changes.

1. Possible Problems with ZBB Zero-based budgeting can help nonprofits, particularly very well-run ones, improve their efficiency, effectiveness, and productivity. However, it is not a panacea, nor is it particularly easy. The following are difficulties that may arise while attempting ZBB:

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ZBB must have dependable, detailed cost information available from the accounting system (which is not always possible). ZBB often feels very threatening to both managers and staff because it involves evaluating, making comparisons, and deciding on desired changes. ZBB requires fairly detailed planning and cost calculations and can be even more difficult and time consuming if it is introduced organization-wide rather than piloted and phased in over time.

2. Benefits of ZBB Despite these possible problems, ZBB obviously has many benefits, not the least of which is that it encourages managers to look at a broader range of options than they would if using incremental budgeting (Strategies 1 through 3). Nevertheless, because of the potential difficulties, we recommend that organizations experiment with this technique before applying it in a full budgeting process. Using ZBB initially for just one or two programs will produce a better understanding of its most beneficial application and its strengths and weaknesses. Chapter Eighteen discusses zero-based budgeting in more detail. Use Worksheet 6.4 to plan when and how to carry out this strategy.

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WORKSHEET 6.4 Zero-Based Budgeting 1. List by whom, when, and how the ZBB approach will be explained to unit heads and others.

2. Identify the specific training that people in finance and other programs and units will get to understand and implement the ZBB approach.

3. List each of the organization’s units, programs, and activities that are to be reviewed and analyzed, along with the level of financial and other resources currently committed to and generated by each.

4. List the individuals in each unit, program, or activity who will be sent the appropriate parts of the list for review, analysis, and option building.

5. Describe the various options or models that have emerged now that each unit has, in effect, answered the question: ”If we were not already doing this, knowing what we now know, would we do it the same way?”

6. List the anticipated income and costs for each model or option (use varying activity levels when appropriate).

7. Describe whether each specific program, function, or activity should be eliminated, modified, or continued relatively unchanged.

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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Part Two

Step-by-Step Budgeting Guidelines

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Chapter 7

Start with the Budget-Building Checklist AS YOU BEGIN to develop your budget, use the following set of questions to direct your search for specific budgeting information. If this checklist is your starting point in using The Budget-Building Book for Nonprofits, you may want to skim Part One for background information when you come to a question on a particular topic of interest. If you have already read Part One, consider the following cross-references to information in Chapters One through Six as opportunities for solidifying your knowledge base. Although The Budget-Building Book for Nonprofits covers many more topics than listed here, this checklist will guide you to the information you will need to begin your review. The CD that accompanies this book contains software and spreadsheets to assist you in the budgeting process. See Resource G for more details.

1. What sort of budget do you want to create? (a) An operating budget for the organization as a whole? If YES, see Chapters 12, 14, 15, 16, 17, and 18 and Resource E. (b) An operating budget for an individual program or unit? If YES, see Chapters 13 through 18 and Worksheets B.1 through B.6 in Resource B. (c) A capital budget? If YES, see Chapters 2 and 19. (d) A cash flow forecast? If YES, see Chapters 2 and 22. (e) A zero-based budget? If YES, see Chapters 2 and 18.

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2. Do funding sources require specific budget formats, categories, or line items? If YES, you will need a copy of all required budget formats, categories, or line items. Please make sure the entire budget team uses the latest communications from funding sources, because budget rules and guidelines can change frequently. 3. What budget development strategies do you plan to use? (a) Setting annual organization outcome goals from the top down to guide development of draft program and unit budgets? If YES, turn to Chapter 4, Sections B and C, and Chapter 6, Section A. (b) Setting annual income and expense targets from the top down to guide the development of draft program and unit budgets? If YES, turn to Chapter 6, Section B; Chapter 8, Sections B and C; Chapter 13, Sections B, C, and D; and Chapter 15, Sections A and B. (c) Having program and unit heads prepare three draft budgets showing their priorities for increased, decreased, and unchanged total budget amounts? If YES, turn to Chapter 4, Section B, and Chapter 6, Section C. (d) Using zero-based budgeting? If YES, turn to Chapter 18 and Chapter 6, Section D. 4. Will budget development involve various types and sources of funds? If YES, see Chapter 5. 5. Do you need to create or update any of the following written budgeting policies and procedures? (a) Basic budgeting policies and procedures? (b) Income projection policies and procedures? (c) Expense projection policies and procedures? (d) Cash flow projection policies and procedures? (e) Policies for budgeting roles, responsibilities, and authority or for modifying in-house or funding-source budgets? If YES, see Chapter 8. 6. Is each of the following aware of the group’s or his or her individual responsibilities and involved in the budgeting process? (a) The board and specific board committees? If NO, see Chapter 3, Section A. (b) The executive director, president, or CEO? If NO, see Chapter 3, Section B. (c) The chief financial officer or controller? If NO, see Chapter 3, Section C. (d) The program, unit, or activity managers? If NO, see Chapter 3, Section D.

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Start with the Budget-Building Checklist

7. 8. 9. 10.

11. 12.

13. 14. 15.

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(e) The department managers? If NO, see Chapter 3, Section E. (f) Any others (such as consultants, volunteers, or clients)? If NO, see Chapter 3, Section F. Is there an up-to-date budgeting calendar? If NO, see Chapter 9. Do you want to establish annual budget guidelines, priorities, and goals? If YES, see Chapter 4. Do you want to create an annual budget preparation package? If YES, see Chapter 11 and Resource F. Do you want to orient program and unit managers to budgeting requirements? If YES, see Chapter 10. Do you want to revise draft budgets, or get some ideas on how to trim them? If YES, see Chapter 17. Do you need to allocate administrative and overhead costs among programs and units? If YES, see Chapter 16. Do you need to present a proposed annual budget to the board? If YES, see Chapter 20. Does the board need to review, revise, and approve the final budget? If YES, see Chapter 21. Do you want to monitor and modify the approved operating budget? If YES, see Chapter 23.

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Chapter 8

Designing Your Budgeting Policies and Procedures PROJECTING INCOME and expenses is easier and the results are more accurate and understandable when written policies and procedures exist to provide budget team members with necessary guidance.

A. Basic Budgeting Policies and Procedures The organization should set out its basic policies and procedures: 1. Identify the specific steps, responsibilities, and timetables in the budgeting cycle, and incorporate them into the budgeting calendar. 2. Identify those responsible for preparing and disseminating the budgeting package to be used in preparing budget estimates. 3. Identify the contents and format of r The overall budgeting package to be used in preparing draft budgets r The format to be used in preparing draft budgets 4. Identify the number of draft budgets to be prepared by each program and unit manager. (Options include one showing estimated increases in income or expenses, or both; one showing no change; one showing estimated decreases in income or expenses, or both; or any combination of these.) 5. Identify those responsible for preparing draft budgets and approving them.

B. Basic Income Projection Policies and Procedures The organization should set its basic policies on income: 1. Identify those responsible for estimating and for approving proposed changes in income.

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2. Set the percentages of change in existing income for program and unit managers to use in preparing draft budgets. (Options are a percentage increase, no change, a percentage decrease, or any combination of these.) Be sure to communicate in advance with all current and potential funding sources regarding any possible changes in funding or eligibility for specific funds. 3. Identify those responsible for estimating and approving the certainty of receiving anticipated income from individual funding sources. 4. Identify the level of certainty needed to include anticipated funds in projected income and in preparing program and unit draft budgets. For more detailed information on income projection, see Chapter Fourteen, Section A, and Chapter Fifteen, Section A.

C. Basic Expense Projection Policies and Procedures Expense policies and procedures must be established: 1. Identify those responsible for estimating and approving proposed changes in expenses. 2. Identify the percentages of change for existing salaries, wages, and fringe benefits to be used in preparing draft budgets. (Options are a percentage increase, no change, a percentage decrease, or some combination of these.) Check union contracts or other contractual agreements to ensure budgets are based on legal commitments. In addition, health care, insurance, gasoline, and utility costs have been increasing steadily; make sure your assumptions are accurate and up to date, particularly in these areas. 3. Identify the methods for determining changes to existing expenses in preparing draft budgets. (Options are estimating a percentage increase or decrease or determining actual increases or decreases by checking leases and catalogues and researching prices on the Web and negotiating with suppliers and vendors, or both.) 4. Identify the methods for determining the amount of any new expenses. (Options are actually checking with suppliers and catalogues and researching prices on the Web or simply checking other organizations’ budgets if available, or both.) For more detailed information on expense projection, see Chapter Fourteen, Sections B and C, and Chapter Fifteen, Section B.

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D. Basic Cash Flow Projection Policies and Procedures The organization should set basic policies on cash flow projection: 1. Identify those responsible for projecting cash flow and generating and updating monthly cash flow reports for all programs and the organization as a whole. 2. Identify who is to receive cash flow projections and reports on a regular basis. 3. Identify those responsible for identifying, reporting, and taking corrective action to deal with cash flow problems. 4. Identify the reporting and approval authority and the process for implementing corrective action. See Chapter Twenty-Two for a more thorough discussion of cash flow forecasts.

E. Policies Establishing the Fiscal Year A nonprofit may employ various considerations in choosing when its fiscal year will begin and end. For instance, many nonprofits choose a fiscal year that coincides with the program or fiscal year of their major funding sources. This approach can greatly simplify the process of closing and preparing the necessary accounting entries and financial reports required by the funding source. However, if a nonprofit has several significant funding sources and each has different reporting requirements, this approach may not be practical for choosing a fiscal year. One other factor affecting the selection of a fiscal year is the type and schedule of services provided. A nonprofit that provides seasonally fluctuating programs and activities (such as a summer camp) may select a fiscal year that closes after its busiest season. This timing will benefit the organization by simplifying the process of accruing income and expenses and will allow the staff workload to be distributed more efficiently.

F. Other Needed Policies and Procedures Other budgeting policies and procedures are also needed, including those dealing with the following areas:

r r

Budgeting roles, responsibilities, and authority Modifying in-house and funding-source budgets

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G. Checklist for Information to Include in Written Policies Creating a checklist of the specific content headings to be covered in written policy statements can help the organization provide uniform guidance and formats to those who are preparing written policies. Here are recommended topics for such a checklist: 1. Specific name of the proposed policy 2. Two or three sentences describing the purpose of the policy (what it is intended to accomplish) 3. The scope of the policy (including information describing the circumstances, transactions, decisions, and staff members to whom the policy applies; any time or dollar restrictions; and what constitutes an emergency situation in which authorized persons can override the policy and its required procedures) 4. Persons, positions, or groups responsible for writing the proposed policy 5. All persons and groups who must provide preapproval review of and input into the proposed policy, such as the following: r The outside funding sources that require specific actions or procedures in the given policy area (such as a policy on bids to purchase certain kinds or amounts of equipment) r The corporate attorney (for policies involving legal questions or requiring a legal opinion) r The independent auditor (regarding government cost principles, special regulatory rules, tax implications, and other requirements) r The board (usually its review and input are required before it exercises its final approval authority) r The employees and organization units that will be most affected by the policy 6. Those responsible for communicating and interpreting the policy to others 7. Those responsible for ensuring that specific people and units comply with the policy 8. Those with the authority to override or short-circuit the policy’s procedures in an emergency situation 9. The responsible parties, means, and timetables for reviewing and updating the policy and its related procedures and also for changing actual day-today procedures and practices to ensure better compliance with the written policy

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H. Final Review and Integration The last part of creating written policies is to review and compare all the written policies and make any revisions needed to ensure that they dovetail and support each other and are cross-referenced as needed. In addition, training should be planned and implemented to ensure that those who will need to use the policies fully understand them.

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Chapter 9

Creating Your Budgeting Calendar

FEW ORGANIZATIONS understand the importance of creating and disseminating a budget calendar. Identifying tasks and assigning target completion dates are crucial aspects of effective budget management. Good budget calendars act as a communications tool, providing all budget team members with an overview of the process, as well as specifying who is responsible for accomplishing key tasks by the target dates. To develop the budgeting calendar, management needs to identify

r r r

The key tasks in the budget development cycle The budgeting timetable, including target dates for completing each task Those responsible for accomplishing each task

The budget development calendar should be reviewed each year and revised in light of the previous year’s experience and any anticipated changes.

A. Five Steps for Developing the Budgeting Calendar This section explains the five steps necessary for creating an effective budget development calendar. Step 1. List major budget development tasks. Major budget cycle tasks may vary depending on the size of the nonprofit and the overall budget development strategy it adopts. For instance, larger nonprofits may need lengthy datagathering and planning processes that include multiple phases and tasks, such as the following:

r r

Developing guidelines for salary and price increases Preparing or updating income and expense estimates

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r r r r

Reviewing and updating long-range financial and strategic plans Establishing income and expense goals for programs and departments Developing budget priorities, guidelines, and instructions for the coming year Communicating with funding sources to determine how they plan on adjusting their grants (for example, are they providing an increase for inflation?)

Smaller nonprofits may require somewhat shorter planning processes and fewer phases and tasks. No matter what the nonprofit’s size, however, the CFO’s first step is to think through the entire budget development cycle and clearly define what must be done. Step 2. Establish overall time frames and specific deadlines. The times chosen to begin and to end the overall budget development process will depend heavily on the size of the nonprofit and the complexity of the specific budget development strategy chosen. Budgeting processes in which program or unit managers actively participate should begin at least seven months before the budget must go into effect. Longer lead times give top management more time to prepare budgeting guidelines, materials, and instructions, and they allow unit or program managers more time to develop their draft budgets. However, long lead times also mean that fewer months or quarters of the current year’s financial information are available to help managers project income and expenses into the coming year. Thus, the need for accurate projections based on current financial data must be weighed against the need for a realistic time allotment for completing important budgeting steps. Step 3. Identify those responsible for each task. Establish accountability for completing each budgeting task by identifying the individual responsible for ensuring the completion of each required task by the deadline. In this way everyone knows who is supposed to do what in developing the budget. Step 4. Seek review and comment from board and staff. Board and staff review of and comments on the draft budget cycle and calendar provide two benefits. First, board and staff members may identify aspects of the draft budget cycle and calendar that others have overlooked in compiling these documents. Second, they may be able to recognize when deadlines are unrealistic from their individual or department perspectives. Review by support and clerical staff can also be helpful because these individuals may be able to provide an accurate estimate of the time required to prepare and duplicate budget development instructions and materials. Step 5. Revise and distribute the final budgeting calendar. In revising and distributing the final calendar to the board and staff, it is critical that everyone involved in or affected by the budgeting process be clearly informed of the steps in the

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process, the budgeting schedule, and what is expected of him or her. Whenever the budgeting calendar is modified, the changes should be communicated in writing to the same people who received the first draft calendar. Exhibit 9.1 contains a sample budgeting calendar for a large nonprofit, using a calendar year as a time frame.

B. Instructions for Creating an Annual Budgeting Calendar Follow these instructions to create a budgeting calendar. Use Worksheet 9.1 to record the tasks, dates, and responsible parties. 1. In chronological order, list each major task in your organization’s annual budget development cycle. 2. Add the overall budget development cycle’s beginning and ending dates. 3. Add target dates for completing each individual task in the budget development cycle. 4. Add the names of the persons responsible for ensuring that each task is completed. 5. List the deadlines for r Distributing the draft budgeting calendar to board and staff for their review and written comment r Receiving written comments from board and staff r Revising and distributing the final budgeting calendar to board and staff Readers should note that some funding sources require budgets to be approved by local community groups or stakeholders before submission. Any required approvals that are outside your organization’s direct control need to be factored into your calendar’s design.

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EXHIBIT 9.1

Sample Budgeting Calendar for a Large Nonprofit Deadline Date

Major Tasks

Responsible Person(s)

6/1

Meet to review strategic plans, goals, and objectives.

Board, CEO, and CFO

6/15

Prepare income and expense forecasts; set budget targets and budgeting policies and procedures; prepare budgeting materials, guidelines, and instructions.

CEO and CFO

7/1

Plan and hold kickoff meeting; present major budget development policies and guidelines, materials, and instructions to unit and program managers.

CFO

8/1

Follow up by giving unit and program managers any needed budget development training and additional materials needed and by identifying specific Finance Department staff to contact for help.

CFO and finance staff

9/1

Unit and program managers prepare draft budgets and backup documentation by deadline, following policies and instructions.

Unit and program managers

10/1

Consolidate all draft budgets and income and expense projections into one; submit to top management by deadline.

CFO

10/15

Top management reviews draft budgets and discusses them with unit and program managers to arrive at any revisions.

CEO and CFO

11/1

Prepare final, revised overall and unit and program budget documents for presentation to the board.

CFO

11/15

Present budget to board for its review, discussion, modification, and approval.

CEO and CFO

11/30

Incorporate all board-approved changes into final budget documents.

CFO and finance staff

12/15

Distribute approved budget to top management, unit, and program heads, and any other appropriate people.

CFO

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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WORKSHEET 9.1 Creating an Annual Budgeting Calendar Deadline Date

Major Tasks

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Responsible Person(s)

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Chapter 10

Orienting Program and Department Managers and Staff to Budgeting FOR AN ANNUAL budgeting cycle to be efficient and successful, everyone involved must have a clear understanding of the annual budgeting goals, guidelines, procedures, and timetable, as well as the specific roles and responsibilities in the budgeting process. Each year program and unit managers and participating staff members should be oriented to current budgeting requirements through the following three steps: Step 1. Plan and hold a budgeting kickoff meeting at which the CFO, appropriate finance staff, and program and unit managers review and discuss the budgeting package (budget development goals, calendar, guidelines, forms, worksheets, and instructions). Tips for holding an effective budget team meeting are detailed in this chapter. Step 2. Provide program and unit managers with budget development training and any additional materials as needed. Step 3. Identify the specific finance staff members whom program and unit managers can call on for coaching and help as needed.

A. Budget Team Meeting To ensure that the budget team meeting accomplishes its intended purpose of orienting staff to budgeting requirements, plan the meeting carefully. Devoting time and thought to this planning will go a long way toward fostering productivity during the meeting. The first step upper management should take, and fairly soon after the meeting is announced, is to clarify to all participants the purpose of the team meeting. Additional guidelines for those planning the budget team meeting follow:

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1. Team meetings should be for r Making brief announcements r Identifying issues and problems r Generating ideas and suggestions r Holding brief discussions r Making decisions r Reporting progress r Assigning follow-up activities 2. Team meetings are not the best place for r Having long and involved discussions r Gathering detailed information r Analyzing problems in detail r Doing the background work needed to solve problems Ideally, most if not all fact-finding, analytical, and detailed work should be done by individuals or by small subgroups between meetings. In this way only the results (and not time-consuming processes) are presented to the entire team during the team meeting. This strategy will free up time for the tasks for which the entire team needs to be present.

B. Practical Considerations When Planning Budget Team Meetings Consideration 1. Plan the meeting space and arrangements. The configuration of the physical space in which a meeting is held influences the manner in which participants communicate, which ultimately affects productivity. For an egalitarian meeting and one that encourages participation of all members, consider using a round table or several tables set up in a U shape or a square. This will ensure that members have equal access to one another and to any displays. Avoid any seating arrangement that might be described as a classroom setting. Consideration 2. Set the length of the overall meeting. With few exceptions, meetings should not last more than one to one and a half hours. This time frame is the upper limit of most adults’ productive attention span. Let the budget team know in advance how long the meeting will be, and stick to that time limit. This conveys respect for everyone’s time and encourages participants to be concise and direct. Consideration 3. Prepare a written agenda with a time limit for each item. A written agenda is an essential tool for maintaining focus and efficiency during a team meeting. It should be as specific as possible, with a realistic time

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allotment assigned to each task on the agenda. When assigning time limits, keep in mind that giving information takes the least time, generating ideas takes longer, discussing an issue takes even more time, and group decision making usually takes the most time of any task. Consideration 4. Prepare a written summary. Make sure that the meeting does not adjourn until a summary of the meeting has been reviewed by the participants, to ensure that everyone understands his or her follow-up assignments and due dates. This summary should specify which team members are to receive what information. To ensure proper follow-up, the formal minutes of the meeting must be promptly distributed in writing to each team member.

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Chapter 11

Contents of the Annual Budget Preparation Package PREPARATION OF AN ANNUAL budgeting package for distribution to those with major budgeting responsibility is usually overseen by the CFO or other top-level financial manager. At a minimum, each budget preparation package should include the following elements:

r r r r r r r r

Completed program and unit budgeting instructions and copies of budgeting guideline forms. See Worksheets 11.1 and 11.2 for sample forms. An updated budgeting calendar. See Chapter Nine for information on creating or updating the budgeting calendar. A copy of a blank program or unit workplan. See Worksheet A.1 in Resource A for a sample blank workplan. Copies of the appropriate blank budget forms. See Worksheets B.1 through B.6 in Resource B for a sampling of blank operating budget forms. A copy of a blank form for summarizing proposed budget changes. See Chapters Seventeen and Twenty-Three, including Worksheet 23.1. Budget assumptions and highlights. See Chapter Fifteen, Section D. A letter of transmittal. See Chapter Twenty, Section A. A reference copy of this book.

Furthermore the CEO or CFO should consider providing a short written overview describing budgeting perspectives, unique circumstances, directives, instructions, and any other information that might be useful to those participating in budgeting. For an example of such a letter, see Exhibit F.1 in Resource F. In addition to the resources just listed and the worksheets in this chapter, Resource B

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WORKSHEET 11.1 Program or Unit Budgeting Instructions I.

YOUR ANNUAL PROGRAM OR UNIT GOALS A. List your specific program or unit outcome goals: (See Chapter 13, Section C, for more information on developing outcome goals.) 1.

2.

3.

4.

5.

(Attach additional sheets as needed.) B. List your related program or unit activity goals: (See Chapter 13, Section C, for more information on developing activity goals.) 1.

2.

3.

4.

5.

(Attach additional sheets as needed.) II. YOUR PROGRAM OR UNIT BUDGET GOALS A. Total income goal: $ B. Total expense goal: $

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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Contents of the Annual Budget Preparation Package

WORKSHEET 11.2 Budgeting Guidelines for Programs or Units A. Draft Budget to Be Prepared (Check the one that applies.)  Prepare ONE draft program or unit operating budget based on the budget goals.  Prepare TWO draft program or unit operating budgets: one based on the budget goals and one on a total amount that is percent lower/higher. (Circle one.)  Prepare THREE draft program or unit operating budgets: one based on the budget goals, one on a total amount that is percent higher than the budget goals, and one on a total amount that is percent lower. B. Salary and Wage Increases to Be Applied  Adjust the wages and fringe benefits of existing employees to reflect a as of each employee’s anniversary date.

percent increase

C. Changes in Fees  The board has authorized an increase of up to percent for programs or units that need to increase income by adjusting fees charged for goods or services.  Please check here if your program or unit is proposing to increase any fees charged for goods or services as a way to increase income for the coming year.  If your draft budget includes any increase in fees for goods or services, please specify the following in your transmittal page: 1. Kind and amount of each fee to be charged: a. $ b.

$

c.

$

d.

$

2. Amount and percentage of increase for each fee: a. +$

(

%)

b.

+$

(

%)

c.

+$

(

%)

d.

+$

(

%)

3. Total amount of each fee you expect to bill: a. $ b.

$

c.

$

d.

$

4. Total amount of each fee you expect to collect: a. $ b.

$

c.

$

d.

$

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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WORKSHEET 11.2, Cont’d. Budgeting Guidelines for Programs or Units 5. Expected fee totals compared to last year: Fee Budget Year a. $

Last Year $

b.

$

$

c.

$

$

d.

$

$

D. New Programs, Positions, and Employees  Any new programs must be discussed with and approved by the CEO and CFO prior to presenting draft budgets.  Any plans to fill existing positions that currently are vacant must be discussed with and approved by the CEO and CFO prior to taking any action.  Any plans to create any new positions must be discussed with and approved by the CEO and CFO prior to taking any action. Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

contains the following samples of blank budget formats, to aid in the development of budgeting forms: 1. A blank, organization-wide budget format for a community services organization (Worksheet B.1). 2. Blank program and unit budget formats for r A museum curatorial department (Worksheet B.2). r A building and security department (Worksheet B.3). r A membership department (Worksheet B.4). r A museum exhibition or other special event (Worksheet B.5). 3. A blank program or unit budget form with instructions (Worksheet B.6). 4. Blank examples of formats for r A capital project budget (Worksheet B.7). r A capital budget for a building (Worksheet B.8).

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Chapter 12

Developing Organization-Wide Operating Budgets THERE ARE TEN steps to creating, implementing, and managing an annual, organization-wide operating budget made up of individual program or unit operating budgets. The first five steps prepare your organization for the annual budgeting process; the second five lead you through the creation of this budget. This chapter presents a brief description of each step. The persons usually involved in performing the step are noted in parentheses. The chapters that contain a more detailed look at the specific aspect of budgeting involved in the step are also identified. Those involved in the budgeting process may decide to use all or some of these steps, selecting and modifying the tasks and activities in each step to suit their organization’s unique circumstances.

A. Five Steps to Prepare for the Annual Budgeting Process Step 1. Select a budgeting strategy (board, CEO, CFO). The CEO, CFO, and board should choose a budget development strategy that they deem best suited to their organization’s structure, the budget development timetable, the strategic plan, and their management style. Chapter Six describes four basic budget development strategies. Step 2. Develop next year’s budget goals and guidelines (board, CEO, CFO). This is a crucial and frequently overlooked step in which the board, CEO, and CFO create the overall context within which budgeting for the coming year will take place. They review the nonprofit’s mission, its current fiscal status, and its projected income and expenses for the coming year. They then establish any budget guidelines and outcomes or goals needed to guide the development of the coming year’s budget. For more on this step, see Chapter Four.

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Step 3. Create the annual budgeting calendar (CFO). The process of developing a detailed budgeting calendar is described in Chapter Nine. Step 4. Create budgeting forms, materials, and instructions (CFO). To develop their annual draft operating budgets, program and unit managers need a budgeting package that includes blank forms, instructions, and guidance on income and expense targets and constraints for the coming year. The CFO is responsible for ensuring that the needed budgeting package is developed in line with the budgeting calendar deadline. For more information, see Chapter Eleven. Step 5. Orient managers to the budgeting goals and process (CFO, finance staff). The CFO and finance staff must communicate and discuss annual budget development forms, guidelines, and timetables with program and unit managers, who in turn need to understand fully the budgeting package and what is expected of them. We strongly recommend that you hold a budget kickoff meeting that includes all managers responsible for developing draft budgets, the CFO, and key finance staff. For more information, see Chapter Ten.

B. Five Steps to Create Annual Budgets Step 6. Prepare draft program and unit budgets (managers). Each program or unit manager uses the budget development package to develop and submit a lineitem draft budget for the next year that is based on specific program or unit budgeting or outcome goals. For more information, see Chapters Four and Thirteen. Step 7. Review and revise draft program or draft unit budgets (CFO). When all draft budgets are received, finance staff should prepare a summary total of all the requests to give management a full picture of the resources requested by program and unit heads. Finance staff should also review all draft budgets to ensure that they have been properly and accurately prepared and to identify issues and changes likely to have a significant fiscal or program effect. With the aid of these reviews the CFO or other fiscal staff should prepare analyses of each budget. These analyses should identify issues, options for changes, and fiscal staff recommendations. From this summary the CEO and CFO can determine whether draft budgets must be trimmed and, if so, by how much. After the draft budgets have been revised, the CFO should meet with each program or unit manager to discuss that individual’s draft budget and top management’s revisions. This step is likely to be an iterative process, repeated until a satisfactory result is achieved. For more information, see Chapter Seventeen. Step 8. Prepare and submit a proposed budget to the board (CFO, CEO). Using the results of the draft budget review, the CFO prepares a proposed organizationwide operating budget for submission to the CEO and then to the board. After

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the CEO approves the proposed budget, support staff prepare the budget proposal and any necessary supporting documentation, and the CEO or CFO presents it to the board. For more information, see Chapter Twenty. Step 9. Review, revise, and approve the final budget (board). The board reviews the proposed organization-wide budget and evaluates the extent to which it is likely to achieve the outcome goals and income and expense targets set at the beginning of the budgeting process. Board members may need additional information or may wish to explore alternatives to proposed budget provisions with the CEO or CFO. The board should handle budget changes or amendments as specified in the nonprofit’s policies or bylaws. The CEO and CFO should clearly identify the potential effects of any board revisions before the board approves the final budget for the coming year. For more information, see Chapter Twenty-One. Step 10. Implement, monitor, and modify the budget (CFO, finance staff, managers). The final approved budget is distributed to relevant program and unit managers and finance staff. It may be necessary to orient program and unit managers to the approved budget to ensure they understand it and can plan for any needed changes to program and support operations. Finance staff then incorporate the approved budget into the nonprofit’s accounting and financial reporting systems. The CEO and CFO at their levels and the unit and program managers at theirs are responsible for implementing the approved budget and carrying out all required financial reporting, monitoring, and corrective action, which can include modifying the budget. For more information, see Chapters TwentyTwo and Twenty-Three.

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Chapter 13

Developing Operating Budgets for Individual Programs, Units, or Activities PROGRAM AND UNIT managers are often responsible for preparing annual draft budgets for their individual programs and units, with assistance from finance staff, review and revision by the CFO and CEO, and final approval by the board. Consultants who specialize in helping organizations prepare budgets may also be useful in providing technical assistance in the preparation of detailed program or unit budgets. Each nonprofit should have a step-by-step written approach for program and unit budgeting, so everyone involved knows who does what and when. Program and unit managers may use Worksheet 13.1 to aid in planning for program and unit budget development.

A. Planning for Program or Unit Budget Development A top manager, the program or unit head, and a finance staff member work together in preparing budgets. To succeed they should develop a plan and clarify responsibilities at the outset. Here are seven suggested steps for doing this: Step 1. Agree on program or unit basics. A manager (executive director, assistant director, or director of programs) meets with a program or unit head (program director, services coordinator, or program developer) and a finance person (CFO, controller, or business manager) to discuss and agree on the basics of the proposed program or program renewal. Step 2. Clarify the program or unit head’s responsibilities. The manager assigns the program or unit head the responsibility for developing next year’s program or unit goals, a detailed workplan, and an outline of basic budget items and estimated costs.

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WORKSHEET 13.1 Planning to Prepare a Program or Unit Budget BACKGROUND 1. Organization: 2. Program or unit to be budgeted for: 3. Specific program or unit goals to be budgeted for: a. Outcome goals:

b. Activity goals:

BUDGET PREPARERS 4. Person(s) primarily responsible for preparing budget: a. b. c. DEADLINES 5. 6. 7. 8.

Budget due for board review on: Board review, revision, and approval: from Budget developers should first meet on: Each budget preparer’s responsibilities: a. b. c.

to

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Step 3. Clarify the finance person’s responsibilities. The manager assigns the finance person the responsibility for reviewing the contents of the final, detailed budget. Step 4. Create draft program or unit goals and the workplan. The program or unit head develops a draft of the program or unit goals and a draft workplan for the coming year. Step 5. Review and revise program or unit goals and workplan. The manager and program or unit head review and discuss the draft program or unit goals and workplan, revising them as needed.

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Step 6. Identify budget categories, line items, and costs. The program or unit head meets with the finance person to identify basic budget categories and line items as well as estimated costs. The finance person, in conjunction with the manager, then prepares a detailed program or unit budget from this basic outline, using the budget format and guidelines of any relevant funding sources as required. Step 7. Agree on the final program or unit budget. The manager, finance person, and program or unit head meet to review, discuss, and revise the final program or unit budget, which is then submitted to the CEO and CFO.

B. Basic Steps in Creating a Program or Unit Budget The following six basic steps may be used to create a detailed program or activity budget: Step 1. Identify anticipated sources and amounts of income. Step 2. Set specific goals for the program or unit. Step 3. Prepare a detailed workplan for reaching the goals. Step 4. Identify all the resources (employees, consultants, facilities, and supplies) needed to implement the workplan. Step 5. Determine the costs of all resources. Step 6. Prepare the budget.

C. Setting Two Kinds of Program or Unit Goals In program or unit planning and budgeting, there are two basic kinds of goals: outcome goals and activity goals. Outcome goals are measurable statements of what a program or unit is expected to accomplish during the coming year (that is, the specific results it should achieve). The following is an example of an outcome goal: To enable fifty potential high school dropouts entering tenth grade to complete high school within three years. This is an outcome goal because it defines the specific, measurable results desired for specific people by a certain time. Activity goals are measurable statements of activities or services that will help the program reach its outcome goals. They do not identify results; they identify activities that can lead to results. The following is an example of an activity goal: To provide an average of 350 hours of after-school tutoring and counseling to each of 100 potential high school dropouts during each year of the project.

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This is an activity goal because it defines specific, measurable activities (tutoring and counseling services) that will be carried out within a set time to help reach the desired outcome or goal.

D. Preparing a Program or Unit Workplan Once program goals are stated as outcome goals, activity goals, or both, the next step is to identify what must be done to reach them. This means identifying all the action steps needed to organize, carry out, and evaluate the specific program or unit and also identifying the target date and those responsible for each action step. The example in Exhibit 13.1 shows part of a possible workplan for a program with the outcome and activity goals listed earlier in Section C.

EXHIBIT 13.1

Sample Program or Unit Workplan Action Steps 1 2 3 4 5 6 7 8

Recruit, screen, hire staff. Orient and train staff. Establish written eligibility criteria. Design intake forms and procedures. Make initial contacts with schools for referrals. Reach agreement with four schools for referrals. Orient school staff to eligibility criteria and referral procedures. Design outreach and recruitment activities and materials.

9 10 11 12

Begin ongoing outreach and recruitment. Begin accepting referrals and walk-ins. Screen referrals and walk-ins for eligibility (ongoing). Enroll minimum 15 eligible students per month (ongoing).

13

Help enrollee create individual plan by 4 weeks after enrollment (ongoing). Help enrollee begin implementing plan by sixth week after enrollment (ongoing).

14

Responsible Person

Target Date

Project director Project director Project staff Counselors Recruiter Recruiter Recruiter Recruiter and project director Recruiter Counselors Counselors Counselors and recruiter Counselors

Week 4 Week 5 Week 6 Week 6 Week 6 Week 8 Week 10 Week 9

Counselors

Months 5–13

Project director or CFO

Month 36

Week 10 Week 10 Week 12 Months 4–11 Months 4–12

[These are only some of the action steps for a program or unit workplan. A complete workplan would include action steps for all program or unit activities, up to the final action step below.] 37

Prepare and submit final program evaluation and financial reports.

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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For a worksheet you can use to create a program or unit workplan, turn to Worksheet A.1 in Resource A and review the instructions. Following are some of the benefits nonprofits can gain from preparing detailed program or unit workplans:

r r r r r

Program and unit budgets will be more accurate. Managers will have more opportunities to think through and clearly describe the action steps they will follow to achieve their program or unit goals. Management will be more able to convince funding sources that the nonprofit is worth supporting. Newly hired managers and staff will have an increased understanding of and focus on what needs to be done when, and by whom. Management and staff will find it easier to monitor progress; designation of target dates will facilitate program and fiscal adjustments in response to the problems that inevitably arise.

E. Identifying the People and Things Needed to Implement a Workplan Program and unit budgets should allow for all the people, things, activities, and costs needed to organize, carry out, and evaluate a specific program or unit. Once the program workplan has been completed, review it and begin listing the specific positions and things needed and what each will cost. If the budget in development will provide for a new program or make significant changes to an old program, see Worksheet F.2 in Resource F for a sample program change request form. Program and unit budgets usually show planned expenses organized by general cost categories (consumable office supplies, for example), with specific line-item costs (such as those for paper) listed under each category. Sometimes funding sources identify the specific cost categories and line items they expect funding recipients to use in preparing a budget. At other times, they may just give general guidance, leaving it up to the nonprofit to decide on the specific categories and line items. The National Center for Charitable Statistics (NCCS) Web site, which you will find at http://nccsdataweb.urban.org, offers a Unified Chart of Accounts (UCOA) for nonprofits to use in their accounting and budgeting systems. Sponsored by a variety of nonprofit support organizations, the UCOA is an attempt to standardize the recording and reporting of financial information in the nonprofit sector. A recent edition of UCOA is included on the CD that accompanies this book, and the NCCS Web site will have the latest version available for download.

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Whether or not your organization uses the UCOA, it will be necessary for you to delineate which line-item costs belong to which accounting system expense code. In the previous example, paper was the line-item cost which was a part of consumable office supplies. Examples of various kinds of program or unit budget outlines are provided as worksheets in Resource B. Generic outlines like these should be used only when a potential funding source does not provide its own set of cost categories and line items. When generic outlines are used, they should also be carefully tailored to the specifics of the particular program or unit being budgeted.

F. Identifying Personnel Costs First, list the numbers and titles of personnel needed to carry out the program or unit workplan:

r r r r r r

Administrative and fiscal and bookkeeping staff. Supervisory staff. Direct service staff. Clerical staff. Other staff (if applicable). Consultants and professional (or contract) services. This group should be listed by specific functions or areas of expertise, such as medical, educational, psychiatric or psychological, legal, auditing, accounting, employment, information technology, or management services.

When a change in staffing is included in the coming year’s budget, complete a new position request form, such as the sample form shown in Worksheet F.3 in Resource F. Second, enter the salary of each of the staff members you have listed and the percentage of time each person will be employed in the program, with 100 percent being full time. For consultant and professional or contract services, include the numbers of hours or days of service needed, the hourly or daily rate for each function or area of expertise, and the total amount involved for each. Next, list employee fringe benefits, including those required by law, such as the Federal Insurance Contributions Act (FICA) tax, state unemployment insurance (SUI) tax, and workers’ compensation insurance, as well as any other fringe benefits provided, such as medical insurance and pension benefit costs. (Be sure to differentiate between fringe benefits that part-time employees get and fringe benefits that only full-time employees receive.)

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G. Identifying “Other Than Personnel’’ Cost Categories The rest of the budget usually consists of costs other than personnel costs, arranged in broad categories such as equipment, supplies, facilities, and other items needed to carry out the program. Such cost categories may include some or all of the following:

r r r r r r r r r r r r r r

Consumable materials and supplies, including office, medical, training, vocational, recreational, laundry, and housekeeping supplies; food and beverages; and other program supplies Facilities, including offices and other facilities for implementing the program, and their annual rental, maintenance, and renovation costs Insurance, including insurance for facilities, vehicle and travel-related insurance, and any other kinds of program or activity insurance (but not insurance provided to employees as a fringe benefit) Specific assistance for clients, which could include allowances or other cash payments and personal items (such as clothing and health and beauty aids for maintaining hygiene and personal appearance) Travel and transportation, including client transportation, staff travel, and costs involved in acquiring and operating any vehicles Rental, lease, or purchase of equipment, including office equipment, computer hardware and software, and other program equipment Printing and reproduction, including photocopying Communications, including telephone, broadband, and postage costs Training, conferences, and meetings, including training for staff or clients and meetings and conferences for disseminating technical information about the program Membership dues for trade, business, professional, or technical organizations Subscriptions to professional journals or other publications needed for a program Miscellaneous goods or services not identified earlier Contingency expense Budgeted surplus

The last two cost categories do not directly correspond to any particular expense. The contingency expense category is a rational way of planning for the unexpected; when prices increase faster than anticipated or other unexpected costs are incurred, this contingency cushions the shock and helps the nonprofit avoid large budget overruns. Note that when the money budgeted for a contingency is actually spent, the expense is recorded in the usual way; the line item called contingency expense is never used when posting an expenditure to the accounting

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system. A budget modification should be made, upon receiving the appropriate written approval, to transfer the amount from the contingency line item to the line item for the actual expense incurred, thereby reducing the remaining amount budgeted for contingencies. The concept of a budgeted surplus might seem foreign to many in the nonprofit world, but it is a necessary component of every budget. Without a surplus of revenue over expense, the nonprofit will never accumulate the resources it needs to remain a healthy, stable organization, and it will never develop the resources it needs to take advantage of future opportunities. Some funding sources require recipient programs to use particular methodology and nomenclature when assigning expense categories. For example, one funding source may require insurance costs to be listed under the general category of other costs, whereas another may require insurance costs to be listed in their own specific category. Check specific funding-source requirements when developing budgets, to make sure each budget conforms.

H. Identifying Specific Line-Item Costs In identifying costs for specific line items under each budget category, use past experience and recent budgets for other programs to identify similar costs. Vendor’s catalogues list prices for goods and services, and vendors can be asked to supply cost quotations for specific items. For example, contact your phone service provider for installation and basic monthly charges, insurance agents for the cost of needed coverage, consultants for the cost of their services, and food wholesalers to get the prices in advance for large food and beverage purchases. The resources of the Internet can be used to shop for the best prices. However, nonprofit organizations need to be alert to their image within their community. Some nonprofit organizations operate facilities that the local community resents, due to the nature of the clients served or other issues. These organizations sometimes try to make their local neighbors happier by buying as many supplies as possible locally; this supports the local economy and garners some local goodwill.

I. Providing Budget Justification or Cost Documentation Funding sources and budget reviewers often require explanations of line-item costs, which may be referred to as budget justification, budget detail, or cost documentation. Exhibit 13.2 shows some examples under the budget category of travel. As these examples show, budget justification or cost documentation is simply an explanation of (1) what you are going to spend money on, (2) how you arrived

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EXHIBIT 13.2

Justification of Travel Expenses Staff Mileage (Estimated 10 round trips per month × 12 months between Springfield headquarters and Lambertville satellite by private auto at 50 miles each trip × 44.5 cents per mile.)

$2,670

Client Travel (Rental of 50-seat bus for 1 round trip a week between Lambertville and Springfield to attend job training classes for estimated 48 weeks at $250 per trip.)

$12,000

Conferences and Conventions (Four round-trip airfares from Springfield to Denver, Colorado, at $500 each for professional development conference on “Exemplary Programs for Increasing High School Graduation Rates.”)

$2,000

Counseling Consultants (Five days of assistance by counselors at $1,000 per day.)

$5,000

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

at the total figure for a specific line item, and (3) for what purpose each line item will be used. See Chapter Fourteen for more on budget justification.

J. Matching and In-Kind Contributions Budgets are sometimes required to show matching contributions or in-kind contributions. Matching contributions are resources the nonprofit may be required to provide in order to qualify for the funds being requested in the budget. Matching contributions may have to be in cash or in-kind, that is in the form of noncash resources like staff, goods, or services. Matching and in-kind contributions are usually listed as specific line items under the appropriate cost categories and are explained like any other part of the budget. They should be clearly identified, so the reader of the budget will realize they are not requests for support. (Matching and in-kind contributions must also be listed as revenue in the appropriate part of the budget.) See Chapter Five for more information.

K. Distributing Copies of Final Program or Unit Budgets Copies of final program budgets should be distributed to those who

r

Are responsible for a program or unit or for the resources used in a program or unit

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r r r

67

Make decisions that affect the use of resources (resources include people’s time and activities; equipment, facilities, and supplies; and expenses) Keep track of expenses or results Are involved in program or unit planning, decision making, or reporting

Obviously, these individuals include supervisors, middle managers, and top managers and also important service providers and fiscal and bookkeeping staff. After all, if “a budget is a plan for spending money to reach specific goals by a certain time,” then everyone involved needs to know what the plan is. In our opinion, keeping budget information confidential is impossible and in fact defeats the purpose of good budgeting. Some organizations try to keep salary data confidential. Your organization’s culture and budget guidelines, mandated by your funding sources, will guide your own organization’s decision in this area. Note that the annual federal reporting forms, required to be filed by most tax-exempt organizations, contain the annual compensation for the highest-paid staff members; this information is available to the public.

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Chapter 14

Major Components of Operating Budgets

DETAILED OPERATING BUDGETS include anticipated income by source and amount, the amounts of individual line-item expenses, and totals by major budget categories (such as salaries, fringe benefits, supplies and materials, and equipment). Each draft budget should also include a summary of budget highlights, explaining any changes in income, expenses, programs, and services; any actions affecting personnel (such as raises, promotions, and the creation or elimination of positions); and any other changes to the current budget or current operations. Ideally, the draft budget includes information that substantiates the budget (for example, an itemized list of requested equipment with individual prices or a discussion of increases in costs), which is often known as budget detail or budget justification. A section on budget highlights, with examples, may be found in Chapter Fifteen. The following sections present brief discussions of the major components of a draft operating budget.

A. Projected Income Budgets include projected income by sources and amounts, and they explain any assumptions used to make each income projection. See Chapter Fifteen for detailed information on projecting income and also for worksheets and examples.

B. Projected Expense Categories and Subcategories Budgets include a summary of requested expenses by various account categories and subcategories, with subtotals given for each category. When creating budgets,

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use the budget categories and subcategories that are required by your organization or an individual funding source. Chapter Fifteen details expense projection techniques.

C. Projected Expenses by Line Item Under each account category, the budget should identify specific expense line items and amounts, as shown in the example in Exhibit 14.1, which displays some line items under the budget category insurance costs. EXHIBIT 14.1

Projected Expenses by Line Item Directors’ and Officers’ Insurance (covers board members and officers against liability arising from their official duties; $300 per month × 12 months)

$3,600

General Liability Insurance (protects nonprofit against liability arising from facility use and employee work-related actions; $500 per month × 12 months)

$6,000

Comprehensive Insurance (fire, theft, and damage from “acts of God”; $200 per month × 12 months)

$2,400

Vehicle Insurance (protects nonprofit and employees when operating motor vehicle as part of their duties; $1,250 per month × 12 months) Subtotal, Insurance

$15,000

$27,000

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

D. Budget Narrative or Justification Where feasible or required, a budget may also include written narrative detail to explain and justify its figures, including descriptions of the ways specific income or costs were calculated and explanations of significant increases or decreases. For more information, see Chapter Thirteen, Section I.

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Chapter 15

Estimating Income and Expenses

ACCURATELY ESTIMATING income and expenses six to eighteen months in advance can be challenging, especially when many variables and unknown factors can affect a nonprofit’s income stream and costs. Developing any budget requires the following three steps: Step 1. Carefully estimate the coming year’s income from various sources. Step 2. Carefully estimate the expenses needed to operate for the coming year. Step 3. Prepare a summary of budget highlights, so top management and the board can understand the program’s or unit’s priorities and perspectives.

A. Estimating Future Income Estimating future income is difficult for many reasons. However, projecting income is easier and more accurate when some basic annual policy decisions are made early in the process. Worksheets 15.1 and 15.2 are relevant to the process of estimating income.

1. Making Needed Annual Policy Decisions Two areas in which management must make annual policy decisions are speculative income and fee changes.

a. Policies Regarding Speculative Income Decide whether the budget will include income the nonprofit has a chance of receiving but for which it has not yet received a firm commitment. Speculative or uncertain income may include grants for which applications are pending or not yet submitted, promises of future contributions (pledges), income from new and untried programs or services, or the results of future fundraising efforts. In

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WORKSHEET 15.1 Identifying Sources, Types, and Amounts of Funds 1. From fee-for-service contracts SOURCE a. b. c. d. Subtotals

LIKELIHOOD OF FUNDING

AMOUNT $ $ $ $ $

% % % % %

2. From grants SOURCE a. b. c. d.

LIKELIHOOD OF FUNDING

AMOUNT

Subtotals 3. From related trade or business activities free from unrelated business income tax (UBIT)

$ $ $ $ $

% % % % %

ESTIMATED PROFIT

SOURCE a. b. c. d. Subtotals 4. From unrelated trade or business activities subject to UBIT

LIKELIHOOD OF RECEIPT

$ $ $ $ $

% % % % %

ESTIMATED PROFIT

SOURCE a. b. c. d. Subtotals 5. From asset-generated income free from UBIT

$ $ $ $ $

Subtotals

LIKELIHOOD OF RECEIPT

$ $ $ $ $ ESTIMATED INCOME

SOURCE a. b. c. d.

ESTIMATED UBIT

$ $ $ $ $

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

% % % % % LIKELIHOOD OF RECEIPT % % % % %

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WORKSHEET 15.1, Cont’d. Identifying Sources, Types, and Amounts of Funds 6. From asset-generated income subject to UBIT SOURCE a. b. c. d. Subtotals 7. From direct cash contributions (not pledges) SOURCE a. b. c. d.

ESTIMATED PROFIT $ $ $ $ $

AMOUNT

Subtotals 8. From pledged cash contributions SOURCE a. b. c. d.

SOURCE AND NATURE OF CONTRIBUTION a. b. c. d. Subtotals

LIKELIHOOD OF RECEIPT % % % % % LIKELIHOOD OF RECEIPT

$ $ $ $ $

% % % % %

AMOUNT

Subtotals 9. From noncash (in-kind) contributions

ESTIMATED UBIT $ $ $ $ $

LIKELIHOOD OF RECEIPT

$ $ $ $ $

% % % % % ESTIMATED VALUE

LIKELIHOOD OF RECEIPT

$ $ $ $ $

% % % % %

AMOUNT

LIKELIHOOD OF RECEIPT

Total of Restricted Funds (You will need written descriptions of all funding source restrictions.)

$

%

Total of Unrestricted Funds

$

%

Total Estimated Funds

$

%

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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WORKSHEET 15.2 Analyzing the Certainty of Future Income Current Date:

Fiscal Year:

1. Assured Income SOURCE AND PURPOSE

Amount to Include in Budget

AMOUNT $ $ $ $

PERCENTAGE OF CERTAINTY % % %

INCLUDE IN BUDGET? Yes No Yes No Yes No

% % %

INCLUDE IN BUDGET? Yes No Yes No Yes No

% % %

INCLUDE IN BUDGET? Yes No Yes No Yes No

2. Likely Income But Not Assured SOURCE AND PURPOSE

Amount to Include in Budget

AMOUNT $ $ $ $

PERCENTAGE OF CERTAINTY

3. Uncertain Income SOURCE AND PURPOSE

Amount to Include in Budget

AMOUNT $ $ $ $

PERCENTAGE OF CERTAINTY

Total amount of income to include in budget Amount of uncertain income included in above total Total amount of uncertain income not included Total amount of income possible in coming year Total amount of income certain in coming year

$ $ $ $ $

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

addition, those who are developing budgets should always understand that income that has been approved by a funding source may be subject to reduction before it is actually received. Such income should be clearly identified as uncertain, the estimated percentage of certainty of receiving it should be determined, and any costs to be met with such uncertain income should be clearly earmarked and controlled. There is always a danger that, by relying on the receipt of speculative or uncertain income, a nonprofit organization can place itself in financial jeopardy. Too much optimism tends to produce budgets that are difficult (or impossible) to meet.

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By looking at the likelihood of receiving income from the various funding sources, you can make reasonable estimates of how much to include in the budget. It is best to use a conservative approach, even if it turns out that you have underestimated the income actually received.

b. Changes in Service Fees Another common budgeting policy issue involves deciding if new service fees will be charged or if existing fees will be increased, and if so, what those fees will be. Many nonprofits charge fees (often on a sliding scale) to offset the costs of providing services. (Any nonprofit planning to charge fees for the first time or to increase existing fees should be sure that existing or potential funding sources do not prohibit this.) Determining fees may require analyzing service unit costs to determine the expense of the relevant services per unit. Similarly, market research may be needed to determine whether clients can and will pay the fees, whether fee changes are likely to reduce the number of clients and therefore the number of services provided, and how the amount of income gained from providing the services will be affected by the fee change. Please see the discussion of break-even analysis in Chapter Eighteen, Section E.

2. Projecting Various Kinds of Income Ways to project income vary according to the source and nature of the income. However, no matter what the source and nature, it is important to document the assumptions used to prepare income projections. Often income projections need to be revisited and revised during the budget development process. When there is a thorough record of the original assumptions, double counting of possible fee increases or additional grant funds, and other potential mistakes may be avoided. Documenting assumptions can also help managers to explain the budget to the board and others. 1. For grant or contract income, reliable income projection indicators might include r The actual income and estimates previously provided by funding sources r Funding-source payment schedules r The status of current negotiations for continued or new contracts or grants 2. For ongoing or special fundraising campaigns, income indicators may include r Prior years’ experience r Current pledge collection rates r Net income after expenses from any other fundraising activities

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3. For income from fees and charges, income indicators include r Prior years’ actual experience r Any adjustments to fee amounts r Expected service levels or caseloads 4. For income from investments, you can communicate with your investment adviser and discuss any expected changes in interest rates or expected stock market trends. Our best advice is to use conservative estimates in this area. Some organizations budget or spend income from investments only during the year after it is earned. In this way they always have a built-in emergency reserve and know exactly how much they can spend (because they have already earned the money). Some organizations use such income only for special projects, so that ongoing operations are not affected negatively if this income stream is reduced by market conditions or the economy. 5. For income from sales of products, we also recommend a conservative approach to projecting income. Using the prior year’s sales increased by a small amount may be an effective tool. In general, because income is far harder to project than expenses, we suggest that for all noncontractual income streams a conservative income projection position be taken.

B. Estimating Expenses As with making income projections, estimating expenses requires policy decisions early in the process and specific ways of handling each type of expense projection.

1. Annual Policy Decisions Decisions must be made on the following topics:

r r

Cost increases. Will salaries, wages, and operating expenses be increased? If so, by how much? (Make sure to include planned and contractual wage increases.) Costs of generating future income. If anticipated but as yet unsolicited income (funding to be sought during the coming year) is included in the budget, any additional expenses related to generating it should also be detailed. This may include additional costs for proposal writing, fundraising campaigns, and fundraising events.

2. Projecting Salaries and Wages For most nonprofits, salaries and wages are the largest part of the annual operating budget, so they must be projected as accurately as possible. A failure to budget

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properly for equipment and other discretionary expenses can often be corrected by delaying purchases; a failure to meet a payroll because of incorrect forecasting is far more serious. Carefully budgeting personnel costs reduces the chance of unanticipated financial difficulties during the fiscal year. The simplest way to budget for salaries and wages is to create a spreadsheet listing all authorized positions, including vacant ones that will be filled. For each position listed, supply the budgeted hourly rate, the budgeted total number of work hours, and the budgeted wages. If the position is salaried, include the total annual salary and then calculate the hourly rate by dividing the annual salary by the number of hours in a workweek, multiplied by fifty-two weeks. Position listings should be maintained throughout the year, and any changes in authorized positions or hourly rates should be posted as they occur. In this way the updated spreadsheet can be used for the next annual budgeting process. The spreadsheet can also be used to calculate the impact of any proposed salary, wage, or fringe benefit increases. By adding columns to the spreadsheet with formulas for calculating the effect of variables (such as the percentage of a salary increase and the increase’s effective date), the total impact of an increase can be calculated rapidly and accurately. Because nonprofits’ payroll costs frequently constitute 60 to 85 percent of total expenses, it may be wise to take one of the two following actions:

r

r

Budget for overtime in a separate line item. If the entire overtime line-item amount is not used, it can be reassigned to cover deficits in other areas or used to build the organization’s surplus or net assets (if allowed by the funding source). Budget for part-time staff in a separate line item. Rather than paying regular staff time and a half or more for overtime, it may be more desirable to budget for and hire part-time staff to meet overtime demands.

3. Projecting Fringe Benefits Ways to project employee fringe benefit costs vary according to the size of the nonprofit, the applicable state and local laws affecting minimum benefits, and the benefits offered and how they are provided. Use government publications to identify the employer’s share of taxes for Social Security, Medicare, and unemployment insurance for the coming year. Insurance carriers can often provide estimates of any increases in the cost of health, life, and workers’ compensation insurance. Pay particular attention to budgeting for workers’ compensation insurance, including giving it its own line item. If there have been a number of staff injuries, the organization may have to make large payments to maintain coverage. Specialized

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consultants can help you review your nonprofit’s claims history and identify ways to reduce workers’ compensation expenses.

4. Projecting Other Operating Costs Projecting operating costs beyond salaries and fringe benefits usually requires yearto-year adjustment for (a) any projected change in prices (usually increases) for goods and services and (b) any projected change in usage or volume of goods and services.

a. Identifying Projected Prices Identify increases built into leases and other contracts. Then project price changes for services, supplies, materials, commodities, and equipment required to operate programs or activities. The simplest way to do this is to contact vendors or providers of services and ask for estimates of any anticipated price changes. (This approach works best with vendors with which the organization has a long-standing relationship.) If vendors cannot or will not give price increase estimates, you must develop independent estimates. Many nonprofits simply use the most recent estimated annual rate of inflation. Although this may not be accurate for each individual item or service to be purchased, it usually results in a sufficient across-the-board increase in the operating budget to cover most individual price increases. There are nevertheless times when volatility in certain commodity prices makes it advisable to estimate the level of increase individually. A recent example is the price of gasoline. When nonsalary costs are a substantial part of the operating budget, take particular care with projecting price increases. For example, if printing and postage make up a large part of the annual budget, get accurate estimates of future costs from printers and paper vendors, and contact the postal service regarding possible postage increases. The Internet can often be used to do rapid and economical research on cost issues.

b. Identifying Changes in Usage or Volume The second step in projecting operating costs is to identify changes in operations likely to reduce or increase the use of supplies, materials, services, equipment, or other nonsalary costs. Changes can come from an expansion or contraction of existing programs or services, an increase or reduction in demand for existing programs or services, or the introduction of new programs or services. For example, expanding day-care center enrollment six months into the new fiscal year will increase income and expenses. Similarly, a plan to phase out a program during the first three-quarters of the next fiscal year requires projecting when and by how much costs are likely to decrease.

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Often both of the steps just discussed are needed to project operating costs accurately. For example, if postage rates will increase by 10 percent beginning the fourth quarter of the next fiscal year (with no increase in the amount of mail to be sent) and half of anticipated mailings will occur after that date, one option is to increase the current postage budget by 5 percent. Another is to schedule more of the planned mailings before the increase takes effect.

C. Summarizing Proposed Changes in Draft Budgets Exhibit 15.1 displays a sample summary of proposed changes in a draft budget submitted for the CFO’s, CEO’s, or board’s review and approval. Worksheet 15.3 contains a blank copy of the same form; it can be photocopied, modified, and used in the preparation of draft program, unit, or organization-wide budgets.

EXHIBIT 15.1 Sample Form for Summarizing Proposed Draft Budget Changes Program/Unit: Project Head Start Date Submitted: 08/18/x7 By: R. Holmes Date Reviewed: 09/16/x7 Action Taken: Submit to Finance Date: 10/16/x7 By: J. Browne For Current Year

Changes in Budget Categories Salaries: Average 4 percent merit increase (4 percent of Actual) 1 additional teacher’s aide (new permanent position) 1 vacancy (part-time social worker) (position eliminated after 3 months) Subtotal, Salaries: Consultants and professional fees: (special project eliminated) Subscriptions: (subscriptions eliminated) Classroom supplies: (increased use of computer supplies) 1 2

For Next Year’s Budget Approved1 Increase (Decrease)

Budgeted Amount

Estimated Actual Amount

Requested Increase (Decrease)

82,000

83,700

3,348

3,400

0

23,400

24,000

24,000

16,000

4,250

(16,000)

(16,000)

98,000 10,000

111,350 8,750

11,348 (1,000)

11,400 02

225

120

(50)

(100)

750

875

200

150

Budget committee final determination Finance restored full budget amount in anticipation of additional work

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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D. Budget Highlights A budget should include a written summary of budget assumptions and highlights, explaining any significant proposed changes, any actions affecting personnel (new positions sought, existing positions recommended for elimination, proposed promotions or raises), and any other significant changes to the program’s or unit’s current budget or operations. Exhibit 15.2 shows a sample of the assumptions and highlights for a unit’s budget.

EXHIBIT 15.2

Example of One Unit’s Budget Assumptions and Highlights Date: 8/1/20x7 Program or Unit: Youth Department Program Director: Jane Smith Dear Roger: Total Income and Expenses

As the accompanying draft budget shows, next year’s budgeted 20x8 income for the Youth Department is projected to exceed budgeted expenses by $800, with expenses of $55,000 and income of $55,800. Following is a general summary of changes from this year’s budget. Income Highlights

In July of this year the State Department of Youth Services informed us that our allocation for the coming year would be reduced by $5,000 due to cutbacks by the state legislature. To address this potential income shortfall, the proposed budget provides for holding a citywide 10K Run for Youth, scheduled for fall of next year, which is expected to generate $10,000 in additional contributions from individuals and corporate gifts. Expense Highlights

The major increase in expenses reflects the 2 percent increase in salaries and wages for eligible employees (those hired on or before [eligibility date]). The scheduled 10K Run for Youth will increase printing, postage, and consulting expenses by $2,000. Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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WORKSHEET 15.3 Summarizing Proposed Draft Budget Changes Program/Unit: Date Reviewed:

Date Submitted: Action Taken:

By: Date:

For Current Year

$

For Next Year’s Budget

Estimated Actual Amount

Budgeted Amount

Changes in Budget Categories

$

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

By:

Requested Increase (Decrease) $

Approved Increase (Decrease) $

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Chapter 16

Allocating Administrative, Overhead, and Shared Costs MOST NONPROFITS have costs associated with administrative staff and operations that support more than one function within the nonprofit and are not directly attributable to specific programs or activities. Some examples are salaries for senior management and for central accounting and purchasing staff; shared facilities costs; and costs for other activities that benefit more than one program, unit, or cost center. Such costs may be assigned to individual program or unit budgets in appropriate percentages, or they may be listed in their own consolidated central budget. Typically, administrative, overhead, and shared costs are allocated on some predetermined basis to the specific programs and activities they support. Although this involves extra steps in budgeting and accounting for actual costs, the benefits justify the effort. First, allocating administrative and overhead costs produces a budget that accurately reflects the true costs of program operations. After allocation, program budgets include not only the direct costs of program staff, supplies, services, and equipment but also a share of the cost of the central or shared services and facilities required for day-to-day operations. Moreover, if a program is eliminated, the administrative, overhead, or shared costs that must be reallocated or reduced are clearly shown. Second, allocating administrative and overhead costs correctly may increase reimbursement. Funding sources may be more willing to support the overhead or indirect costs of a program when the budget clearly shows that these costs are an integral part of the program to be funded. Unfortunately, some funding sources impose contractual limitations on the amount of administrative costs or overhead allowed as a percentage of the total grant budget. Such constraints need to be carefully analyzed by an organization seeking such funds. Sometimes these caps are simply unrealistic and, in some cases, they can be extremely detrimental to the overall economic health of the

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organization. It might be better for the organization not to accept funds under those conditions, even if this requires identifying and soliciting funds from other funding sources.

A. Allocation Methods The key to allocating administrative and overhead costs successfully is having a rational and justifiable, written cost allocation plan. Some commonly used methods distribute administrative and overhead costs based on a program’s or unit’s

r r r

Percentage share of the total budget or the total salary budget Per unit cost of an activity Use of space

All of these allocation methods may be used in a program or unit budget in the appropriate context. For example, when allocating administrative costs (such as costs for senior management, accounting, and purchasing), it may be appropriate to use the percentage share of total budget or of total salary budget method to allocate costs. When allocating shared rent and maintenance costs, a method based on the square footage used by programs is often more appropriate. Specific allocation methods should be reasonable, applied consistently, and substantiated by the nonprofit’s records. Following are some additional examples:

r

r

r

Personnel and consultant costs can be allocated based on employee and consultant time records that clearly identify time spent on specific projects or activities. Employees’ and consultants’ individual travel and other business expenses can be allocated on the same basis. Government grants have recently become much more focused on demanding a very clear audit trail for personnel costs charged to a specific grant. We suggest that you do careful research to determine the correct personnel budget assumptions applicable to each cost center or program. Fringe benefits can usually be allocated as a percentage of individual salaries. In some circumstances it might be necessary to calculate the fringe benefits specific to each employee in order to create an accurate budget. For example, senior executives might receive special fringe benefits that are higher in cost than those benefits received by the average staff member. Telephone expenses are most efficiently documented and allocated by having separate numbers for each department or activity, which allows the organization to request separate bills from the phone company. Larger nonprofits may benefit from purchasing a software product that will automatically monitor phone use by cost center.

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r r r

83

Copying costs can be allocated based on a log that records the specific project for which photocopying is done. Some sophisticated photocopiers have electronic logs that can track copies made for each department or project. Substantial copying volume may justify the use of a separate copying machine dedicated to a specific department. Postage costs can also be allocated based on a manual or electronic log in which postage use is recorded by specific project or program. Space and facility costs, including utilities and maintenance, can be allocated based on square footage or time in use. Vehicle use should be allocated based on mileage recorded in a log that identifies the driver, round-trip mileage, purpose of the trip, and specific program or activity.

No matter which allocation method is used for a particular program or unit budget category, methods should be recorded in writing and applied uniformly to all similar budget development and accounting transactions. The documentation should be updated as needed to reflect any changes in the method and maintained for use by staff and outside auditors. Additionally, allocation plans may be subject to funding source rules, adherence to which is ensured through allocation plan review and written approval by funding sources. Those developing allocation guidelines should review all funding source requirements before choosing allocation methods. Some funding sources require organizations to use specifically designated methods for allocating administrative, overhead, and shared costs.

B. Worksheet for Allocating Costs Use Worksheet 16.1 as an aid in identifying and allocating administrative, overhead, and shared costs.

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WORKSHEET 16.1 Identifying and Allocating Administrative, Overhead, and Shared Costs Allocations Program or Unit Name

Program or Unit Name

Program or Unit Name

Program or Unit Name

Program or Unit Name

Total Allocated Costs

$

$

$

$

$

$

I. Personnel A. Salaries and Wages (list positions and basis for allocation) Central administration Clerical Flscal Human resources Public relations Other allocable positions B. Fringe Benefits (list positions) Full time Part time C. Consultants and Contract or Professional Services (list areas and basis of allocation) Legal Accounting Auditing Medical Educational Psychiatric Psychological Total allocated personnel costs II. Other Than Personnel Costs A. Consumable Materials and Supplies (list items and basis for allocation) Program supplies Vocational supplies Recreational supplies Laundry supplies Housekeeping supplies Office supplies Food and beverages

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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Allocating Administrative, Overhead, and Shared Costs

WORKSHEET 16.1, Cont’d. Identifying and Allocating Administrative, Overhead, and Shared Costs B. Facilities (describe basis of allocation) Program administration Program services and activities Client residences Staff offices C. Insurance Needed for Program Facilities (list items; describe basis of allocation) D. Direct Assistance to Clients (list items; describe basis of allocation) Allowances (cash payments) Personal items Other assistance E. Travel and Transportation for Program Operations (describe basis of allocation) Transporting clients Staff travel Vehicles to be operated Vehicle and travel insurances F. Training, Conferences, and Meetings (describe basis for allocation) Staff and client training Staff meetings and conferences G. Membership Dues for Business, Professional, or Technical Organizations (include basis for allocation) H. Subscriptions to Professional Publications (include basis for allocation) I. Other Insurance (list kinds and basis for allocation) J. Miscellaneous Goods and Services Not Identified Earlier (list kinds and basis for allocation) Total allocated other than personnel costs Total allocations

$

$

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

$

$

$

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Chapter 17

Revising Draft Operating Budgets

AFTER RECEIVING AND TOTALING DETAILED, written draft budgets from organizational units and functional areas, the nonprofit’s CFO (or other person preparing a proposed operating budget for presentation to the board) often must make adjustments to produce that proposed budget. Such adjustments can include modifying estimated income or projected expenses.

A. Updating Fiscal Projections The first step in adjusting draft budgets is to reexamine the assumptions used in projecting income and expenses. Several weeks or months may have elapsed since the original projections were made, and circumstances may have changed. Obviously a time lapse can produce either good or bad news. Good news could include finding that actual price increases for goods and services are lower than originally estimated. Similarly, new income sources may have been found, or higher amounts of income than originally estimated may be available. Bad news could include new program or administrative requirements demanding greater expense than first estimated or the shrinkage or total disappearance of potential income. In any event the person preparing the proposed operating budget must adjust income and expense figures to project the most accurate picture of the nonprofit’s future financial position. This picture will indicate specific adjustments to draft budgets that will be required. Nonprofits can adjust budgets by modifying costs or income. To modify income, a nonprofit must do an analysis (including identifying any associated increases in costs) and develop its own strategy to ensure sufficient income. Cost modification approaches tend to involve either trimming draft budgets in ways that will not significantly affect basic operations or making deeper cuts, which will.

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B. Trimming Draft Budgets There are ways to trim draft budgets that have little or no significant effect on programs and activities. Some ideas follow.

r

r

r

r

r

Calculate salary increases as of anniversary dates. Depending on the organization’s personnel policies, union contracts, and other policies, it may be possible to reduce salary and wage costs by calculating salary increases as of anniversary dates. That is, each employee’s increase is scheduled to occur on his or her anniversary date of employment, instead of on the first day of the organization’s fiscal year. Calculate each position’s actual salary and benefits before the anniversary date at the old rate and after the anniversary date at the new rate. Use competitive bidding. Having different vendors submit competitive written bids for commonly purchased goods and services (including insurance) can reduce expenses. Depending on the local laws in effect, you may also be able to solicit bids on utility services. This is an especially good idea when a particular item has never been put out for bid or when an existing contract has not been rebid for several years. Analyze the use of service agreements. Explore the relative benefits of purchasing a service agreement for maintenance and repair of equipment rather than paying maintenance and repair costs per occurrence. Similarly, determine whether each existing service agreement is being used enough to justify its cost. Depending on the age and condition of equipment, changing the current approach could reduce costs. Seek economies of scale in purchasing. Examine current purchasing patterns and procedures to see whether bundling purchases currently made separately might produce economies of scale and lower prices. In addition to internal bundling of purchases, explore the possibility of entering into mutually beneficial, cooperative purchasing agreements with other nonprofits in the same geographical area. Analyze administrative costs. Consider consolidating or outsourcing administrative functions to reduce costs. For example, if the same or similar data processing functions are performed by staff in different units or programs, consolidating the functions might reduce staff costs or overtime expenses. Outsourcing operations like payroll and check preparation may save money through reducing staff. Alternatively, outsourcing can free up staff to perform more critical functions, thus avoiding hiring additional people. We suggest you do a study of your organization’s needs and the relative costs of internal versus external support. We have found wide variations in the analyses we have reviewed. Make sure the assumptions you are using are carefully thought out and authentic.

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r

r

Defer or eliminate low-priority purchases. Have the unit or program managers who have submitted draft budgets prioritize their requested purchases. Those responsible for preparing the organization-wide budget can then review the prioritized requests to determine which purchases might be postponed or eliminated. Evaluate the amount budgeted as either a contingency expense or a surplus. These line items are important parts of a budget, but you should reexamine your assumptions to see if the amounts can be modified to help you trim the overall budget.

C. When More and Deeper Cuts Are Needed If the budget has been trimmed as far as possible yet further cuts are still required, a nonprofit may have to reduce expenses that will affect existing or proposed programs and activities. It is likely that these deeper cuts will compromise some aspect of the services the nonprofit offers. Obviously, whenever more extreme budget-cutting actions are necessary, program and unit managers should have a high degree of involvement in determining the cuts. For instance, they might identify possible reductions to their budgets and then rank the reductions from least to most damaging. These rankings can be guidelines for making sensible budget cuts that do the least damage from the perspective of the program and unit leaders, those who are most involved in day-to-day operations of the programs being modified. Here are additional options for significant cost cutting:

r r

r

r r

Postpone filling new or vacant positions. Delay starting new activities or expanding existing ones (subject to any funding source requirements). The organization can thereby postpone hiring new personnel and defer new expenses for operating and equipment costs until a later date. If a decision is made to eliminate a proposed new program, be sure to eliminate all expenses associated with it. New activities may have hidden costs in operating and capital budgets, which should be carefully reviewed to ensure that all appropriate accounts are reduced. Reduce programs and services. Minor adjustments to service levels or a gradual downsizing of programs can often yield sufficient savings to balance the budget while minimizing adverse impact on clients. If cuts require reductions in existing staff positions, allow for the expenses connected with laying off people or terminating positions: for example, the

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nonprofit may need to pay out to meet any contractual or policy requirements, such as severance pay, buy-out clauses, or continuation of fringe benefit coverage for a specified period.

D. Avoiding Potential Budget-Cutting Problems Before cutting costs, those responsible for trimming or cutting budgets must become completely familiar with the exact nature and terms of all funding contracts and grant agreements to ensure their due consideration in budget-cutting decisions. The terms of contracts and grant agreements are often subject to audit, so it is important to make sure that reducing expenses at the beginning of a program year will not create problems in the future. For instance, some contracts or grants may require that a nonprofit serve specific numbers of people or provide specified amounts of service within a given time period. Reducing staff or other expenses too sharply may leave the organization with insufficient resources to meet its obligations, and the audit may result in questioned costs that may have to be repaid. Cutting expenses can backfire in other ways too, depending on the nature of the grant or contract. Reducing the total expenses involved in fee-for-service contracts will usually result in cost savings to the organization. However, when it comes to cost reimbursement contracts, reducing expenses can also reduce the total amount of reimbursement an organization is eligible to receive. Thus careful review of all applicable contracts and grant agreements is essential before making decisions on cutting program costs.

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Chapter 18

Zero-Based Budgeting

IT OFTEN TAKES a long time before an idea is accepted and becomes a part of our culture. Zero-based budgeting (ZBB) is one of those ideas that has been around for a long time but has only recently begun to affect the preparation of budgets. The history of zero-based budgeting goes back to the 1960s; Peter F. Drucker first used the term more than forty years ago, and a few large corporations attempted to introduce zero-based budgeting in their organizations at about that time. Some state legislators mandated zero-based budgeting for state agencies over three decades ago. Yet not many organizations are using the concept as a regular part of their budgeting process. Few books or journal articles mention the concept or discuss it accurately. Most organizations understand that new projects need to be analyzed via a formal strategic planning process. Such an analysis must identify the revenues and costs associated with introducing a new program or location or other new project. What is unfortunate is that most organizations do not understand that this type of strategic thinking should be applied on a regular basis to aspects of their operations already in place. We recommend that your organization consider using zero-based budgeting as one of its analytical tools during every budget cycle. Although you probably cannot devote the resources necessary to apply the process to every program budget, it is often very useful and informative to use the technique for at least one program, or other activity. This program needs to be chosen carefully. We suggest that if you are going to spend extra time and effort on the zero-based approach, you choose an important midsized program for your initial analysis. This allows your budget team to gain the experience needed for future analyses.

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A. Overview In essence, zero-based budgeting requires a manager or planner to scientifically determine the best decision when spending money or making an investment. R. J. Forrester, a noted engineer and systems analyst, spoke frequently about the need to “not follow one’s gut” when it comes to making economic decisions but to do a careful analysis of alternatives before starting new projects. Zero-based budgeting is a powerful tool that will allow you to avoid making any gut decisions and at the same time provide you with some valuable information about your organization. Zero-based budgeting focuses on the thorough evaluation or reevaluation of an organization’s planned or current programs, units, or activities to determine if each one should be initiated or continued (and if so, how?). The process requires that management initially justify (or periodically rejustify) the need for various operations of the organization. If your organization decides to apply zero-based budgeting, it will need to discard any built-in assumptions that a program, once undertaken, should continue forever without requiring careful scrutiny on a regular review schedule. An organization has a great deal of flexibility in how, when, and to what extent it will use the principles of zero-based budgeting. It may decide to look at one of its five programs every year. It may decide to look at every program during a three-year cycle, or it may decide not to use the concept at all. We suggest moderation is a good approach to the initial use of ZBB. Another key aspect of effective zero-based budgeting is evaluating the methodology you are using to perform a task or staff a program and then researching the alternatives. Serious application of zero-based budgeting requires an organization to investigate the methodology it is using and not just whether or not the service it is performing is needed or relevant. In order to investigate the methodology properly, the organization needs to assess the alternate methods of performing a specific task. For example, perhaps your nonprofit is using in-house staff to transcribe therapists’ dictated notes, which are needed to substantiate the billing the organization performs for its counseling services. An alternative to using in-house staff might be to use an Internet-based transcription service. Some organizations are using transcription service companies located on the other side of the world. These off-shore companies transcribe dictated material and deliver it back to their clients in a few hours, sometimes at a fraction of the cost of in-house staff. Your analysis would require an assessment of the pros and cons of the alternative methods. You might even try outsourcing support services for one program as a test and then determine if the outcomes were worth the effort. Remember that when using zero-based budgeting you are essentially starting the budgeting process from zero (as opposed to just incrementally increasing

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prior budgetary figures) as you create the next budget. Therefore you need to also start thinking about whether your organization is delivering the necessary service. Would it be better off using its resources to deliver an alternative service, one that more closely matches the needs of the stakeholders (clients)? Looking at alternative deliverables is one of the key activities in performing a proper zero-based budgeting analysis. Another way to think of the process is that the organization must answer the question: “If this product (activity or unit) were not here today, would we start it?” (Peter F. Drucker, Managing for Results, HarperCollins, 1964, 2006). You probably will not want to use the ZBB concept with government grant funds. Because Congress or your local government has decided a program is needed to deliver a service and has awarded a grant to your nonprofit, there is little to research except the methods the organization is using to carry out the program. So, continuing the previous example, considering the use of a transcription service would apply to your analysis, but considering whether or not this program is going to continue would not.

B. Five Basic Questions Managers must address these five specific questions when beginning a ZBB process: 1. Should a given program, activity, or position be continued, or would other activities be more important or appropriate? 2. If the program, activity, or position is justified, should it continue operating in the same manner, or should it be modified? 3. If it should be modified, how will it be modified, when, and by whom? 4. How much should the organization spend on the program, activity, or position being studied? 5. Does the proposed change have “political” backing within the organization, or are we wasting our time trying to make this change? It takes enormous courage to start a zero-based budgeting process. When you consider the implications of these five questions, you realize that zero-based budgeting has the potential to upset the applecart in a way that is often not welcomed. Change is difficult for people to accept, and this process challenges the status quo in a manner that is uncomfortable. Sometimes those staff members who are championing zero-based budgeting find themselves in a truly frightening position politically when they analyze a longrunning, popular program. Nonprofits apply zero-based budgeting to a program because there is a possibility that the assumptions or circumstances that led to this program’s development are no longer relevant to the organization’s clients. Perhaps the latest wave of new immigrants to a city or community has different

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needs and issues from the immigrants served by the original program. Teaching language skills to immigrants might have been a priority in the earlier program whereas affordable housing might be the greatest need of immigrants today. Zerobased budgeting raises issues like these and questions the old assumptions. Even though this is an effective budgeting tool, the answer might be so fraught with both internal and external angst that it cannot be properly addressed. Carefully identify the programs in your nonprofit that would benefit from the zero-based budgeting approach. Depending on the organization’s cultural and political climate, you may find few or even no likely programs for this approach at this time. Keep in mind that zero-based budgeting is a powerful tool and that it will work well when the circumstances are right.

C. Information Provided by the Program It is important to require every segment of the operating unit being evaluated to take the following steps: 1. Identify the major functions or activities it performs. 2. Answer the five basic questions given in Section B, as they pertain to the operating unit. 3. Create alternatives or options based on the answers to the questions. 4. Project anticipated revenues and costs related to each option or alternative. The last step requires the most work, and it is the step where management and staff can make the most errors. It is important to calculate the cost of performing the activity looking not at any prior expenditures but at the task itself: new materials, new suppliers, new methodologies can all come into play. This also is the step that relies most on the financial history of the current operations of the unit or activity being reviewed. This step is where many attempts to do zero-based budgeting bog down. Frequently, organizations do not track costs accurately on a program or division or location basis. The financial reports may indicate the organization has a million-dollar surplus each year. However, management may not be able to determine whether Northern County and Southern County operations are equally profitable or whether the organization breaks even in the north and makes all of its money in the south. We thoroughly understand that nonprofit organizations need to fulfill their missions and have responsibilities to stakeholders (including clients). However, knowing the reason the organization breaks even in one location and has a surplus in another location is important to the budgeting process. In this case the reason might center on whether affordable transportation is available for clients in both counties. Perhaps it is widely available only in Southern County. Another reason might involve how well the program

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head manages the program. It is also possible for varying staff member abilities to contribute to different financial results at different locations. Many times a careful analysis of program operations will reveal that management’s instinct about how well or poorly a location is doing is incorrect. It is sometimes possible to reconstruct a set of books to determine profitability by location. A well-constructed accounting structure and some careful analysis of the raw transaction data can often reveal the true picture of a program’s profitability. Zero-based budgeting must begin with an accurate financial analysis of the present operation. The projected revenues and costs for a program must be realistically determined and based on research. Having the budget team visit other organizations’ operations is a good idea. Interviewing people operating similar programs, either in person or by telephone, is a valuable research method. One important concept is to create at least three different proposed budgets by using three different volume assumptions. (See Chapter Six, Section C, for a discussion of this idea.)

D. Potential Demand Another part of projecting anticipated revenues and costs is a realistic assessment of the actual and potential demand for a new service or unit. Field of Dreams was an interesting movie. The hero hears mysterious voices and virtually bankrupts his family before the dream comes true. Unfortunately, a zero-based budget must be based in reality, and you should determine whether or not a demand exists, and not go with the theory that “if you build it, they will come.” You must determine if the customers or clients exist for the services your organization plans to provide. Market research can be a complex and expensive challenge. Your plans must identify how many customers or clients exist and whether they would choose your organization over any existing service providers. You also may need to budget marketing dollars to spread the word about your new activity, location, or program.

E. Break-Even Analysis Business owners know they need enough capital to start their operations and then keep those operations going until they break even. Break-even analyses are part of basic accounting training and are an important aspect of zero-based budgeting. The following is a brief description of a break-even analysis. Please also see Exhibit 18.1 for a sample of a form you can use to do your own break-even analysis for the idea you are researching or for the current program you are evaluating. A break-even analysis is designed to determine the volume of revenue necessary for an activity to break even economically. Below the break-even point the location, program, or activity will lose money. Above the break-even point the

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EXHIBIT 18.1

Break-Even Analysis Cost Category

Fixed Costs

Utilities (Electricity, Natural Gas) Facility Rent Insurance Auditing Fees Basic Staffing (Core Administrative Staff) Essential Office Equipment costs Supplies Per Patient Visit Therapist Fee Per Patient Visit Totals

Variable Costs

$

3,750 30,000 13,500 6,250 152,200 4,300 10 40

$210,000

$50

Revenue Per Patient Visit

$80

Per Visit Margin (Profit)

$30

Break-Even Volume (Number of Visits)

7,000

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

organization will make money. A break-even analysis requires you to make assumptions about the actual amount of revenue you can collect for the services you provide and your costs of operation. To perform a break-even analysis, follow these steps: 1. Determine the fixed costs. Fixed costs are costs that are not dependent on the volume of business. A fixed cost will remain constant over a wide range of activity; the nonprofit will incur this same cost when it is doing no business at all and when it is doing a large volume of business. Typical fixed cost items are rent, insurance, auditing fees, basic staffing, and office equipment. In our example, a program providing therapy to patients (Exhibit 18.1), we are defining fixed costs as utilities, rent, insurance, auditing fees, core administrative staff, and essential office equipment. The core staff might include an office manager, a front-desk clerk to handle patient appointments and patient flow, and a clerical support person who does filing and basic record keeping and fills in when the front-desk clerk is unavailable. In our example those fixed costs total $210,000 a year. If the program sees no patients in a year, it is still obligated to spend $210,000, and if it has 5,000 patient visits, its fixed costs will still be $210,000. Please note that fixed costs remain fixed only within specific volume assumptions. If this program becomes a huge success and it expands its capacity so that it accommodates 10,000 patient visits a year, its fixed costs will probably increase by some amount.

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2. Determine the variable costs. Variable costs are costs that are specific to the nonprofit’s service profile and are the same for each unit of service. The total of all variable costs will vary with the service volume. In this example we are assuming a variable cost of $50 per patient visit. This amount is calculated based on the cost of the supplies consumed in a typical visit plus the amount the program is obligated to pay a therapist for every patient treated. 3. Determine revenue and profit per unit of service. In our example average revenue per patient visit is assumed to be $80, given the current mix of patients and a slidingscale billing methodology. Subtracting the variable costs from the revenue gives the amount each visit contributes to paying fixed costs. 4. Determine the break-even point. This contribution, or gross margin, is then divided into the total fixed costs to determine how many units of service it will take to cover those fixed costs—the break-even point. In our example, dividing the projected fixed costs of $210,000 by the per visit margin of $30 ($80 in income less $50 in variable costs) yields the result that this program must have 7,000 patient visits per year to break even. Each patient visit over this number would produce $30 in profit because fixed costs have already been covered. That is, the entire contribution margin becomes a profit at a volume greater than the break-even point. Of course this is a very simple example, intended to introduce the concept of break-even analysis. You should work with your finance team to prepare your own break-even analysis for the program you are examining, and then have a person familiar with the program review your assumptions and your calculations. The break-even analysis is also a valuable tool when looking at the viability of any existing program. High fixed costs for a current program may make it virtually impossible to make a profit or even to sustain the activity. This is a relatively simple yet powerful tool we suggest you use in doing zero-based budgeting and other budget analyses.

F. Decision Time Exploring and answering the questions presented earlier and performing breakeven and other analyses for a unit, program, or activity can lead management to the following options:

r r r

Abandon the specific unit, program, or activity, perhaps in favor of other options thought to be more effective. Change, strengthen, simplify, redirect, reorganize, outsource, or otherwise change the existing effort. Make no change.

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G. Getting Started with ZBB Zero-based budgeting can help nonprofits, particularly well-run ones, improve their efficiency, effectiveness, and productivity. However, it is not a panacea, nor is it particularly easy. Here are some difficulties that may arise while attempting ZBB:

r r r

ZBB must have dependable, detailed cost information available from the accounting system (which is not always possible). ZBB often feels threatening to both managers and staff because it involves evaluating, making comparisons, and deciding on desired changes. ZBB requires fairly detailed planning and cost calculations and can make budgeting difficult and time-consuming.

Despite these possible problems, ZBB obviously has many benefits, not the least of which is that it encourages managers to look at a broader range of options than they would if using incremental budgeting. Nevertheless, because of the potential difficulties, we recommend that organizations experiment or do a pilot project with this technique before applying it in a full budgeting process. Using ZBB initially for just one program will give your nonprofit a better understanding of its most beneficial application and its strengths and weaknesses. Your organization can then decide how to best apply it.

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Chapter 19

Capital Budgeting

CAPITAL BUDGETING is a process used when your organization needs to spend a substantial amount of money on one or more assets that are anticipated to have a life span of more than one year. This topic needs your careful attention. A major reason that nonprofit organizations get into severe financial difficulties, including bankruptcy and cessation of operations, is poor or nonexistent capital budgeting. It is usually impossible to properly finance a capital expenditure with money from operations. Capital budgeting is an important element of your organization’s good budgeting practices. Life span is a relative term. For example, if your nonprofit runs a group home for teenagers, the furniture it purchases may need replacement every year (or even more frequently). So despite the fact that furniture purchased by other types of organizations typically lasts for many years, your organization must treat the purchase of furniture as a current operating cost and find a way to do it from the current operating budget. However, if your organization wants to build or buy a new group home facility that will last for more than one year, it will need to prepare a capital budget for that acquisition. Operating budgets normally deal with issues that resolve themselves within each fiscal year. Capital budgeting is used to budget items that will have an economic impact on an organization for longer periods. What is a substantial expenditure? This depends on an organization’s size. If a small organization is going to acquire three vans to transport clients, the costs of these vehicles might require the use of a capital budget. The same purchase made by a very large organization might be too small to need a capital budget. Capital budgeting is a tool used in the acquisition of major assets, and it is more frequently used by larger nonprofit organizations.

98

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More than simply a list of project costs and due dates, a capital budget measures the fit between the project and the organization’s strategic goals. It analyzes the viability of the project prior to any commitment on the part of the board, and it helps to determine how the needed asset or assets will be financed.

A. Strategic Fit When a capital expenditure is first proposed, it is important for management to evaluate the proposed expenditure or project in terms of the organization’s strategic goals. An effective capital budget should answer the following strategic questions:

r r r r

Will the project or expenditure further those goals? Could the resources it will require be more effectively used in other areas? Will the financial burden assumed by the organization to bring this project to completion have a negative impact on other areas of the organization? Are there alternative opportunities that should be pursued?

The answers to these questions are critical to the success of any capital project. Although many organizations build new facilities and acquire expensive equipment, successful nonprofits do so only in response to a pressing need of their clients. Success is ultimately measured by the success each nonprofit has in fulfilling its mission. No matter how large your organization is, you have a limited amount of borrowing power and other resources with which to implement capital project proposals, so it is essential to establish a capital project overview covering a period of several years. An important part of capital budgeting is determining the combinations of financing alternatives that are available. You can then prioritize the substantial asset acquisitions or projects based on need. You also need to determine whether each proposed project is routine, mandated, or entrepreneurial. Routine projects, such as replacing or maintaining essential equipment or facilities, should receive a high priority because failure to perform them will eventually lead to a crisis. Projects mandated by regulations must be analyzed to see if the impact of complying will damage the organization’s overall financial health. In some cases it might be better to cease an activity than to cripple the organization in an effort to comply with costly regulations. Entrepreneurial projects provide the greatest challenge. These are projects that create new opportunities for the organization, perhaps by branching out

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into new areas of service or new fields of endeavor. The important questions for entrepreneurial projects are

r r r

Is the new activity a good fit with the existing organization? Are the projected expenditures for the project justified financially and in terms of the anticipated benefit to the people the project will service? Is the financial scope of the project such that project failure would jeopardize the viability of the organization?

One way to focus attention on the strategic fit is to require that every capital project proposal include a discussion of alternate projects and a variety of methods of funding the project. During the review of the proposal, the project and the alternatives can be scored by the review team (including board members) on how well each one meets the current needs of the organization. Then the organization can determine if the project is worth pursuing or if the resources would be better allocated to some other use.

B. Viability Project proposals must document the impact on your organization’s cash flow and operating income. Will the project increase the revenue stream of your organization? If the project involves adding a new revenue stream, a unit budget should be included with the project proposal to document its overall impact (see Chapter Thirteen). If the goal of the project is to replace or improve an existing facility or piece of equipment, will there be any cost savings due to increased efficiency?

C. Return on Investment A number of financial models can be used to measure a project’s return on investment. We have chosen to use the internal rate of return (IRR) to illustrate a well-known methodology; the IRR seeks to compare the project’s cost with the overall return (cost savings or increased profit or both) from the project. The sixth edition of The Dictionary of Finance and Investment Terms (Barron’s Educational Series, 2003), defines internal rate of return as the “discount rate at which the present value of the future cash flows of an investment equal the cost of the investment.” Technically speaking, the IRR is the discount rate at which the present value of all cash flows added together equal zero. What this means is that there is a percentage (the discount rate) at which any project breaks even financially. The higher this discount rate is, the better the return on the project. To calculate the IRR, you first convert every cash flow, cash in or cash out, into its present value. These cash flow events include the acquisition costs (a negative

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101

cash flow, or cash outflow), the costs to continue to own the asset (a negative cash flow), the income or cost savings produced by the asset (a positive cash flow, or cash inflow), and the amount your nonprofit will realize when it sells the asset (positive cash flow). In capital budgeting the term hurdle rate is used to describe the point above which a project makes sense and below which it does not make sense. We want to stress that this calculation is really trial and error; both the assumptions you use in performing the calculation and the results you derive must be interpreted carefully. The timing of the cash flow events is a critical part of this calculation; present values of these amounts are used because one dollar is assumed to be worth more today than it will be worth one year from now. The present value of a future amount takes into account the fact that you could place one dollar in a bank account yielding, say, 5 percent annual interest and have a balance of one dollar and five cents in one year—in this example using 5 percent interest, one dollar and five cents spent or received one year from now is worth only one dollar today. The IRR is the interest rate used to convert the cash flow events into their present value amounts where the sum of those present value amounts equals zero. You could arrive at the IRR by starting with a reasonable percentage as a guess, and then doing the calculation over and over, adjusting the guess each time based on the results of the previous calculation. This method works, but it is time consuming. Fortunately, spreadsheet software has a built-in function to calculate the IRR. The CD accompanying this book has such a spreadsheet for you to use, and a simple example of the IRR calculation it computes is shown in Exhibit 19.1. In this example the IRR is calculated to be 9.70 percent; if this percentage is greater than your hurdle rate, the project is a good investment for your organization. To make this calculation, you need to know the following:

r r r

The project cost The cost of maintaining the asset The budgeted cost savings or profit that will result from completing the project

The model then calculates the present value of the cumulative savings and compares it to the project’s estimated cost.

D. Financing How will your organization pay for the capital project? Will ongoing operations finance the project from day-to-day cash flow? Has your organization reexamined its use of other capital assets it currently owns to see if any of them could be sold to reduce the need for financing? Will your organization have to arrange for longterm financing in the form of a mortgage, long-term loan, or capital lease, or is it

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EXHIBIT 19.1

Internal Rate of Return Calculation Year 1 Benefits (Cost Savings/Cash Inflows) Reduced costs as a result of asset acquisition Total Benefits Costs (Cash Outflows) Purchase the asset Cost of maintaining the asset Total Cost Net Cash Flow In Current Dollars Cumulative Net Cash Flow In Current Dollars

Year 2

Year 3

Year 4

$30,000.00

$30,000.00

$30,000.00

30,000.00

30,000.00

30,000.00

50,000.00 10,000.00

10,000.00

10,000.00

$50,000.00

$10,000.00

$10,000.00

$10,000.00

(50,000.00) $(50,000.00)

20,000.00 $(30,000.00)

20,000.00 $(10,000.00)

20,000.00 $10,000.00

Internal rate of return 9.70%

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

planning on issuing bonds? Is there a funding source that is willing to contribute to the financing of the project by way of a grant? The financing considerations are closely tied to the viability issues. If the capital project is not financed by a grant from a funding source, you need to calculate and factor in the debt service cash flow, as well as the financing cost, as an impact on your existing budget. Comparing various financing options is a straightforward process. For many organizations the debt service amount is equally as important as the cost of the financing. A nonprofit typically has a wide variety of methods available for financing, including

r r r r

Mortgages and loans Lines of credit Leases (operating leases and capital leases) Bond financing

1. Mortgages and Loans An enormous variety of mortgage and loan arrangements now exist; the terms and stipulations depend on local laws and lender practices. Financing leases (capital

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leases) are similar to mortgages in that the underlying asset is pledged as collateral on the debt. Capital leases are usually less costly than operating leases. Shop around for the best financing opportunity. Ask your auditor, attorney, and insurance broker for a reference. A local consultant may be able to help your nonprofit to satisfy its financing needs. Make sure that the consultant you use is an independent consultant and not simply a salesperson who is motivated to get you to use a particular financing tool.

2. Lines of Credit A commercial line of credit can be secured from a bank. This gives your organization the ability to borrow funds, up to the maximum credit line, as needed and without additional approval from the lending institution. The purpose of the arrangement is to provide a source of cash flow to be used, only as necessary, throughout the typical business cycle. Lines of credit are not useful for capital projects generally, because banks typically require you to reduce the amount borrowed to zero at least once each year for a specific period of time (usually thirty days). Banks or financial institutions lend money in order to make money. Your organization must understand that the fact that a financial institution is willing to loan money does not mean the organization should borrow it. Banks will seize your organization’s collateral or other assets if it does not make the interest and principal payments in a timely manner. Always borrow based on the advice and analysis of your experts and never based on the desires of the bank. Limit your borrowing to the amount necessary; in the case of a capital project, this amount is based on the capital budget (including a modest contingency reserve in case the project goes over budget).

3. Leases There are two basic types of leases: operating and financing. Technically, an operating lease is not a tool for capital financing because the organization never owns the item it is leasing. Most operating leases will let you purchase the asset at the end of the lease for a predetermined amount, but you are also usually free to return the asset to the lender. For smaller organizations, operating leases can be a useful alternative method for acquiring the use of an expensive item needed by an organization but not otherwise affordable within the operating budget. Operating leases tend to be more costly than true financing leases, but they do not add to the organization’s long-term debt on the balance sheet. Leases that provide for the transfer of the title to the asset to the lessee for a nominal fee at the end of the lease are classified as financing or capital leases and are reported as long-term debt on the organization’s books. Such leases sometimes can be used by organizations that have exceeded the debt they can legally incur to acquire needed equipment.

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4. A Note on Bond Financing Most nonprofit organizations will not be able to issue bonds to finance their capital needs. The costs of issuing bonds are substantial, and the process is complicated. However, most states and localities have some type of local authority that can assist a nonprofit organization in issuing bonds under certain circumstances. We suggest you talk to your local attorney, auditor, and bank to find out what your state, city, or community offers in the way of assistance. For example, authorities exist to help finance hospitals and other facilities needed by nonprofit organizations. If you are interested in exploring possible bond financing, it is important that you seek expert advice and ensure that your auditor and attorneys have done such financing work in the past.

E. Two Types of Capital Projects There are two basic types of capital projects:

r r

Capital improvement projects Capital equipment projects

Capital improvement projects involve the construction or major renovation of a building or other facility. Capital equipment projects involve the purchase of equipment and the services required to make the equipment operational. Both types of projects are characterized by the size of the expenditure (larger than an ordinary purchase) and by the useful life of the acquisition (more than one year). When developing the actual capital budget to implement a project, be sure to include all of the costs necessary to complete the project. Examples of costs to include are

r r r r r r

Construction interest Construction insurance Design fees (such as those paid to an architect or engineer) Regulatory fees (permits, inspection fees) Facility or equipment purchase costs Consultant fees

Note that accounting and tax rules can be challenging in this area and sometimes extremely confusing to nonaccountants. For example, construction interest is not an operating cost but a cost that needs to be capitalized and included in the cost of the building. Your accounting staff and auditor need to understand such rules. Determining which expenditure is an expense that goes in the expense budget and which is a capital expenditure that belongs in the capital budget, can be a challenge for the uninitiated. Exhibit 19.2 offers an example of a completed initial project budget.

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105

Capital Budgeting

EXHIBIT 19.2

Completed Initial Project Budget Architect Fee and Plan Engineering Fee Site Engineer Land Acquisition Environmental Approval Fees Sewage Authority Approval Fees Legal Fees: Planning Board Appearance Legal Fees: Zoning Board Appearance Building Permit Fee Mortgage Application Fee Foundation Structural Steel Structural Enclosure: Roof, Siding, Exterior Doors and Windows Electrical Plumbing HVAC Drywall Sprinkler System Alarm Systems Communications Ceilings Tile Work Carpeting Painting Carpentry Wallpapering Site Work: Storm Sewer, Paving, Lighting, Landscaping Real Estate Tax: Land Construction Insurance Construction Loan Interest Inspection Fees Mortgage Closing Costs Legal Fees: Mortgage Closing Accounting Fees: Project Total Project Budget Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

$

38,000 24,000 360,000 6,750 4,200 3,000 3,200 6,000 1,500 80,000 97,500 285,000 84,500 42,000 77,100 55,000 35,000 9,750 6,200 15,000 18,500 23,800 14,000 38,900 18,000 220,000 7,800 4,000 38,000 2,750 6,750 15,000 5,000

$1,646,200

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F. Cash Flow Budgeting or Forecasting It is important to develop a cash flow budget forecast for the implementation phase of the project. For smaller projects this budget will be prepared once, then used to gain approval for the project, and then become part of the project’s documentation. For larger acquisitions, particularly for building construction and renovation projects, a cash flow forecast will be revised and updated on a continual basis. Please see Chapter Twenty-Two for more information on cash flow budgeting and forecasting.

G. Final Considerations Capital budgeting serves three purposes:

r r r

It provides the financial information needed for the board and management to decide if a project is the right fit for an organization. It is a working tool used to find and arrange for the optimum form of financing for a project. It becomes the basis for the cash flow analysis to be used during project implementation.

There are several factors to consider when looking at any financing arrangement:

r r r r r r

Prepayment penalties. The effective interest rate. The amount due at the end of the term to acquire outright ownership of the asset. An analysis of the fair market value (FMV) of the asset at the end of the term. Insurance requirements: these can add significantly to the cost of ownership, particularly when the insurance policy is provided through the lender. Financial covenants: these are the legal restrictions placed on an organization by the lender, requiring that certain financial balances and ratios be maintained as a condition of the loan. Normally, these are a factor only in very substantial borrowings. Be aware, however, that loan or mortgage agreements can give a creditor the right to economically and legally control your organization if you fail to pay the debt as required. Usually such measures are part of bond arrangements or major loans. Make sure your organization understands what its borrowing agreements say.

We recommend careful monthly monitoring of capital budgets. Sometimes cost overruns require that plans be modified and scaled back, or additional fundraising or borrowing may be needed.

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Chapter 20

Presenting Your Annual Budget Proposal to the Board ONCE DRAFT BUDGETS have been analyzed, modified, and balanced, and any necessary technical adjustments have been made, it is time to prepare an overall budget document. This document will be used to present the proposed budget first to the board and then to any other interested parties, such as managers, staff, clients, the press, and the general public. The following sections describe the basic elements of a budget presentation document, with illustrative examples.

A. Letter of Transmittal A letter of transmittal acts as the cover letter for the budget document. Generally, it is written by the CEO to the board, although in some cases the CFO may write it. The letter of transmittal should contain at least two summaries:

r r

A summary of the policies, goals, and objectives that guided the development of the budget A summary of the total income and expenses contained in the budget

Many transmittal letters also contain brief summaries of major budget highlights, such as new programs or initiatives, or changes to existing activities. When a large, complex budget is being submitted, the letter of transmittal may be the only part of the budget that members of the board, the press, and the general public read thoroughly. Because the letter is likely to shape board decisions, as well as media stories and public perceptions, it should contain all pertinent information and should be written clearly and concisely. Exhibit 20.1 contains an example of a letter of transmittal to the board. (With appropriate modifications, this type of letter may also be used by program managers to introduce program and unit budgets to the CEO and CFO.)

107

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EXHIBIT 20.1

Sample Letter of Transmittal November 30, 20x8 Board of Trustees XYZ Services, Incorporated Ladies and Gentlemen: I am pleased to present XYZ Services’ proposed 20x9 budget, which was developed in accordance with the fiscal policies and program priorities set by the Board at its various strategic planning meetings. Specifically, these policies and procedures were

r r r r r

To balance the budget without using cash reserves To budget a 2 percent salary and wage increase for eligible employees, effective January 1, 20x9 To keep programs and services at existing levels To expand fundraising to ensure support for all activities and needed administrative capabilities To keep increases in client fees below inflation

As the accompanying financial schedules indicate, budgeted 20x9 income will exceed budgeted expenses by $1,600, with expenses of $855,000 and income of $856,600. Following is a general summary of changes from last year’s budget. Income Highlights: Shortly after the strategic planning sessions, the United Way informed us that our allocation for fiscal 20x9 would be reduced by $23,000 due to lower contribution levels and recent decisions by the United Way resource allocation committee. To address this potential income shortfall, the proposed budget provides for expanded fundraising activities, including a special event to be scheduled for Fall 20x9 and an additional direct-mail solicitation immediately following the event. These activities are expected to generate $30,000 in additional contributions from individuals, plus a small increase in corporate gifts. The proposed budget for 20x9 includes a moderate fee increase for day-care services. Because of this and an expanded enrollment, day-care income is expected to increase by a total of 5.4 percent, with no more than a 2 percent increase in fees. The budget contains no other fee increases. Expense Highlights: The major increase in expenses reflects the 2 percent increase in salaries and wages for eligible employees. For the second consecutive year, we have negotiated a favorable rate for health and life insurance benefits, resulting in no increase in the average rate used to calculate their cost. However, these rates are expected to rise significantly in the 20x0 budget. The expanded fundraising efforts scheduled for Fall 20x9 will increase overall printing, postage, and consulting expenses. On behalf of the staff of XYZ Services, I would like to thank all Board members for their leadership and direction in developing this proposed budget. We look forward to reviewing it with you and providing any information or clarification you may need before its final approval. Yours truly, (Signature of CEO or CFO, or both) Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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109

B. Total, Organization-Wide Budget Summary A total, organization-wide budget summary offers an at-a-glance version of the budget and tends to be a primary source of information for board members and the media. It should contain summaries of all income and expenses, including (at a minimum):

r r

A summary of income by individual sources. A summary of expenses by broad categories, such as salaries and wages, consultants and contract services, supplies, facilities, materials, and equipment. For an example of an expense budget summary appropriate to submit for board review, see Exhibit 20.2.

The overall budget summary may also include summaries of comparative data for each of the past three years, to let the reader understand any changes in income, income sources, expenses, and kinds of expenses that may have occurred. The overall summary should also contain a column indicating the total change (expressed as a percentage or a dollar amount) from the previous year’s budget.

C. Program, Unit, or Activity Budget Summaries It is desirable for nonprofits with multiple programs and services to summarize categories of income and expenses by individual program or unit as well. This program or unit budget summary is simply another way of presenting overall income and expense information, one that helps to illustrate priorities for the coming year. Ideally, a program or unit budget summary will include the following items:

r r r r

A statement of purpose for the program The program or unit’s goals and objectives for the budget year A summary of program or unit income and expenses, along with comparison data from prior years A brief narrative summary of major changes from the prior year’s budget

Worksheets B.2 to B.6 in Resource B, used earlier to prepare program or unit budgets, can also be used when gathering information for program or unit budget summaries.

D. Detailed, Organization-Wide, Line-Item Expense Budget Proposed budget documents should also include projected expenses by individual line item or account. In general, a line-item budget serves three useful purposes:

r r

It presents in detail exactly what the budget contains. After the budget is approved, it gives managers an exact indication of the resources available and the income they are expected to generate.

110 100 1,700

40 2,000

200

800

500

12,000

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Printing and Reproduction

Project Supplies

1,340

40

Maintenance Supplies

Reproduction Supplies

1,000

2,000

Classroom Supplies

1,130

Client or Pupil Supplies

15,455

Space Costs & Rental

500

300

500

5,000

250

Desktop Supplies

200

200

200

250

500

Out-of-Town Travel

Local Travel

Vehicle, Fuel, Maintenance

Staff & Board Development

100

1,000

60

5,610

1,500

2,000

2,000

2,000

1,000

100

Audit

1,300

5,000

Legal

135

200

800

1,130

500

200

320

45

675

Automatic Data Processing

125

10,620

2,000

8,395

$31,085

2,000

25,335

$93,835

Utility Cost (Space & Rental)

22,208

$82,253

Housing

85,000

11,230

$41,600

Executive Office

400

2,260

150

500

200

126

2,810

13,335

$49,385

Administrative Services

500

500

160

5,605

640

1,500

100

1,000

225

33,190

$122,920

Research

100

13,105

500

100

3,000

270

$1,000

Medical/ Dental

200

250

500

100

200

9,965

$36,910

Information/ Evaluation

4,200

340

4,440

1,660

1,000

2,000

56,295

3,340

4,200

2,150

7,000

4,550

3,320

5,100

1,331

20,430

85,000

192,543

$713,118

Totals

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Repairs

68,615

$254,130

Personnel

Basic Needs

September 3, 2007

Fringe Benefits

Child Care

Categories

Community Services

ABC Corporation Summary Expense Budget for Board Review

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111 6,000

300

785

300

6,500

$355,420

900

$164,076

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

$62,965

$152,985

$141,480

$118,666

$176,510

$49,145

3,600

Miscellaneous

TOTAL

2,500

Contingency

$49,925

$1,271,172

9,600

2,500

4,500

900

5,000

0

33,140

Moving Expenses

2,940

2,000

34,400

500

12,345

925

2,000

26,385

6,000

6,700

7,100

1,560

Totals

0 1,500

3,000

7,200

1,245

500

500

200

300

Information/ Evaluation

Fiscal Accounting

Lease

Other Child Services

Equipment Maintenance and Repair

30,000

1,500

7,200

210

11,485

100

Medical/ Dental

0

5,000

210

200

1,000

2,000

1,000

1,200

60

Research

Field Trips

600

20,000

1,740

200

9,900

Administrative Services

0

200

500

300

25

1,500

700

400

1,000

Housing

Vehicle Operating Expenses

Consultants

Improvements

Food Costs

Liability Insurance

Publications & Subscriptions

500

1,000

1,500

2,000

1,200

Executive Office

11:59

Vehicle Insurance

1,600

700

Equipment Service Agreement

1,000

2,600

2,000

2,500

800

Basic Needs

Computer Equipment

7,855

500

Telephone

Community Services

September 3, 2007

Postage

500

Maintenance and Upkeep

Child Care

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EXHIBIT 20.2, Cont’d.

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r

After the line-item detail of the approved budget is entered into the accounting system, it becomes the basis for tracking, controlling, and reporting budgeted versus actual income and expenses during the coming year.

Smaller nonprofits may provide needed line-item detail in a single listing of all the expense accounts. Larger nonprofits with multiple programs may find it useful to provide similar line-item expense detail for each individual program or activity as well. For an example of a detailed, line-item expense budget, see Exhibit E.1, in Resource E.

E. Individual Program or Unit Budgets Detailed, line-item budgets for each individual program, unit, or activity are particularly useful for nonprofits that have several programs or units with substantially different purposes, operations, or funding sources. Individual line-item budgets for each program or unit should highlight major fiscal and program changes, thus enabling the reader to understand fully the implications for the specific program or service provided. See Worksheets B.2 through B.6, in Resource B, for examples of an individual program or unit budget.

F. Other Useful Information The budget presentation document may also include separate sections or appendixes providing additional information. For example:

r r

r r r

A glossary of terms if the proposed budget document uses unfamiliar, technical language. A summary of major financial and budget policies reflected in the proposed budget, including a description and schedule of the budgeting process; a summary description of specific budgeting assumptions, guidelines, and goals; and other information for understanding the basis for the budget. A summary of the strategic (long-range) organization goals and objectives, defined by the board, that guide the organization’s long- and short-term financial planning. A table of organization structure showing staffing levels by organization unit. Graphics depicting key items of information, such as a pie chart that shows expenses allocated by program area, bar charts indicating changes in expenses or income over several years, and other graphics showing demand and service levels over time.

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Chapter 21

Board Review, Revision, and Approval of the Final Budget BOARD MEMBERS, because of their varied backgrounds, have the potential to make valuable contributions to the budgeting process. In order to achieve this potential, board members must take the time to develop an understanding of all the aspects of budgeting. Board reviews of proposed budgets might be structured in a number of ways. During the original planning and policy development process, top management and the board should determine the board’s specific roles and responsibilities. Some boards set aside a specific number of hours or meetings to allow the board as a whole to review, revise, and approve proposed budgets. Others form working subcommittees to review the various proposed budgets and report back to the entire board. In addition, the board may involve the organization’s consultants or other outside resource people to help it review proposed budgets. Obviously, the more thorough the board review is, the more time it requires. The budget team then needs enough time to consider the board’s concerns, make appropriate revisions, and send the budget back for another review cycle before final budget approval will occur. Worksheets 21.1 and 21.2 are useful for planning and conducting the budget review.

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WORKSHEET 21.1 Preparing for Board Review of Proposed Budget 1. The proposed budget will be reviewed by:  The board as a whole.  One or more board committees (name the committees):  Some other group (describe its composition):  Not yet decided (identify who will decide and when): 2. If not all board members will be invited to participate, name those who will:

3. When and where will they review the budget? Date:

Time:

Place:

4. By what date before the review meeting will they receive copies of the proposed budget? 5. What persons other than board members will attend the budget review meeting?

6. Who is responsible for making sure Items 1 through 5 take place? 7. Who will moderate the board budget review meeting? 8. Who will set review ground rules and present the proposed budget? 9. Who will compile written board review results and recommendations? 10. To whom will board review results be reported? 11. What additional materials will the board need to conduct its review? Who will make sure needed materials are available? Materials Needed

Person(s) Responsible

12. How will any differences between the board and management be addressed?

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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WORKSHEET 21.2 Checklist for Board Review of Proposed Budget 1. Make sure the budget is complete and accurate and has no typographical errors or mistakes in computation. 2. Ensure that the budget reflects the organization’s overall mission, strategic goals, and best use of its resources. r Carefully examine budgets and the programs, units, and activities they support to see how well they conform to the organization’s purpose and objectives. r Determine if the allocation of resources to various programs and units is logical in relation to the organization’s priorities. 3. Determine how well the current year’s actual financial performance to date matches last year’s budget projections. r If actual income and expenses differ widely from those budgeted, determine why. r Decide how to make the proposed budget more accurate, how to implement the approved budget more effectively, or how to do both. 4. Decide if the proposed budget makes sense in the light of the actual financial performance for the current year to date. r If individual programs or units currently are over budget, identify them and the specific cost categories and line items affected. r Determine what caused them to go over budget. r Find out what corrective action, if any, has been taken to reduce the chance of going over budget again next year. r If actual income received has been less than the amount budgeted, identify the areas affected. r Determine what caused the reduced income. r Find out what corrective action, if any, has been taken to reduce the chance of receiving reduced income again next year. r Ensure that corrective action has been integrated into the budget being reviewed. 5. Determine if budget variance analyses are regularly prepared and reviewed by program and unit heads, the CFO, the CEO, and the board in order to catch potential income and expense problems before they become serious. r If budget variance analyses are not regularly prepared and reviewed, act to incorporate these steps into the process. 6. Decide if specific budget items are logical, in the sense that they represent the best way to carry out a program or unit’s activities. For instance: r Examine issues of leasing versus purchasing. r See if resources can be shared between programs or units. r Determine if economies of scale through common purchasing would reduce costs. r Determine if needed services, such as payroll preparation, might be outsourced for a savings over hiring additional staff. Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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WORKSHEET 21.2, Cont’d. Checklist for Board Review of Proposed Budget 7. Be sure that each proposed budget meets the requirements of internal policies and procedures, specific funding sources, individual contracts and grant agreements, various accounting rules, and regulatory bodies such as the Internal Revenue Service. r To carry out this big-picture part of budget review, the board must understand and apply a wide range of requirements. (Discuss this item with the organization’s independent auditor.) 8. Overall, decide whether the organization possesses the talent, skills, and capability needed to implement the proposed programs and activities. r If additional skill or knowledge is likely to be needed, determine what plans, if any, have been made to acquire what is needed. 9. If at all possible, make sure the total organization-wide budget includes designated reserve funds the organization can access if revenue projections fail, unforeseeable expenses arise, or unexpected opportunities present themselves. r If no reserve funds are included, have the board address this issue, and set a goal of creating a specified reserve amount over the next two or three years.∗ ∗

One method for addressing this issue that has proved successful for some nonprofits is to create an additional

contingency budget category for several or all units, departments, or programs in the budget. The contingency category should have 5 to 10 percent of the total program or unit budget amount set aside in it, which can be used to cover unexpected expenses or revenue shortfalls in the coming year. If it turns out at the end of the budgeted period that revenue and expense projections were accurate and actual performance shows no need for the contingency funds, unrestricted contingency funds may be used for staff bonuses or an additional contribution to a pension plan, or they may be saved for a rainy day or a good opportunity.

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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Chapter 22

Cash Flow Reporting, Forecasting, and Management EFFECTIVE BUDGETING must be in place in order to create effective, useful, and reliable cash flow forecasts. This book is designed to help your organization prepare better budgets. This chapter has been written to help your nonprofit organization understand the cash flow implications of the budgets it has created. Effective cash flow management has strategic importance and impact on your organization. Cash flow budgeting is essential to the day-to-day and long-term fiscal health of every nonprofit. There is often a delay between the time an organization “earns” its revenues and the time it actually collects the cash from the revenues earned. Similarly, the costs associated with running an organization are not always paid when the expenses are incurred. Cash flow budgets require organizations to project and describe the schedule, nature, and amount of cash to be received and expenditures to be disbursed. Planning for cash flow management has the same level of importance in a nonprofit organization as overall organization-wide budgeting. Failure to manage cash flow properly can cause severe operational problems. Designed to help you use the operating budget you have created to its best advantage in effectively managing cash flow, this chapter offers instructions and examples on how to develop cash flow forecasts, starting with your completed operating budget. For a more complete discussion of cash flow management, we recommend The Cash Flow Management Book for Nonprofits, by Murray Dropkin and Allyson Hayden (Jossey-Bass, 2001). That book was written specifically to help nonprofit organizations better understand the important topic of cash flow management.

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A. Fundamentals of Cash Flow Forecasting One of the fundamental differences between developing cash flow forecasts and developing operating budgets is in the accounting basis that is used for each. Accrual-basis accounting, which recognizes all income as it is earned (whether received or not) and all expenses as they are incurred (whether paid or not), should always be used in operating-budget development. Cash flow forecasts, however, are constructed using cash-basis accounting, which recognizes only the money that is physically received and paid out. Therefore, the first step in using the organization’s operating budget to develop cash flow forecasts is to eliminate the effect of accruals. This step requires two main actions: cash-basis accounting for cash inflows and cash-basis accounting for cash outflows.

B. Cash-Basis Accounting for Cash Inflows For cash-basis purposes, only money that will be received and deposited by the organization in the period of the forecast should be recognized as cash inflow. For example, assume that the budget you have just prepared for your organization takes into account a planned fundraising event. You estimate that 80 percent of this event’s total expected proceeds will be paid at the door as admission fees and 20 percent will consist of promises to make contributions that will not be received until your next fiscal year. The cash flow forecast for the period during which the event is held should include only the cash that will actually be received during that period. Contributions that are promised in one fiscal period but will be received during a future period will be included in the cash flow forecast for the period during which they are actually received. This means that your accrual-based budget for the event, as well as all accrual-basis financial reporting, will include all monies earned at the special event and the cash flow forecast will include all monies received at the event. Another analogy might be useful: when you pay for a purchase at the bookstore checkout counter with currency, you are (on a cash basis) reducing your available cash. When you use a credit card to purchase the item, you have not paid out any cash, but you have created a debt you owe to the credit card company for the amount of the purchase. The total economic effect is identical. You spent cash in the first example, and incurred debt in the second example. The effect on the accrual-based budget is the same, but the method of payment has an impact on cash flow. Calculating the cash inflow side of a cash flow forecast presents the challenge of recognizing as cash inflow only items that will be collected during the reporting period. To make the forecast as accurate as possible, your organization should examine cash collection rates for prior periods. It may also compare its accounts

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receivable balance with prior-year balances. Prior collection patterns and current characteristics will help you in estimating the likely percentage of collection. These two components—immediately realizable cash and collection of receivables—will normally represent most of the cash inflow that should be recognized in the cash flow forecast.

C. Cash-Basis Accounting for Cash Outflows The outflow component of the cash flow forecast will include only cash paid out by your organization for expenses and any cash payments (expenditures) made to pay down accounts payable or other liabilities. Any depreciation or amortization expenses included in your budget will not be included in forecast cash outflows because they do not represent actual payments of cash. A brief example will illustrate some differences between cash-basis accounting and accrual-basis accounting. Suppose that an organization has an accrualbasis operating budget with expenses totaling $575,000. This figure includes amortization- and depreciation-related expenses in the amount of $45,000. During the budget period the organization will pay down $25,000 of debt. Accounts payable will increase by $15,000. These items would be treated in a cash flow forecast as follows:

r

r

r

The $25,000 used to pay down a loan is a cash outflow that would not be included in an operating budget but would be included in a cash flow forecast. Paying down a previously incurred liability is not an expense; it is simply a reduction in a liability. However, because money is actually paid out, this amount must be shown as an outflow on the cash flow forecast. The $45,000 allocated to amortization and depreciation is not a cash transaction and therefore would not be included in the cash flow forecast as an outflow. Amortization and depreciation are noncash expenses that spread the cost of acquiring an asset over a certain period of time. Money paid to acquire an asset in a prior fiscal period has no impact on the current period’s cash flow. The current period has amortization and depreciation expenses, but the cash outflow occurred in a prior period. The $15,000 increase in accounts payable indicates that the organization financed $15,000 of its operations by incurring additional accounts payable. But because this amount was not actually paid during the forecast period, it should not be included as a cash outflow in the cash flow forecast.

Exhibit 22.1 shows how these expenditures listed in the accrual-basis operating budget would be converted to the appropriate cash-basis expense figure to use in a cash flow forecast.

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EXHIBIT 22.1

Summary of Conversion from Operating Budget to Cash Flow Forecast Total Expenses per Operating Budget (Accrual Basis) Add Repayment of Prior Debt (Outflow)

$575,000 25,000

Subtract Increase in Accounts Payable (No Outflow) Subtract Depreciation and Amortization (No Outflow)

600,000 (15,000) (45,000)

Net Cash Outflows Identified for Cash Flow Forecast

$540,000

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

This process identifies only the total outflow of cash. Next, we must identify timing issues relating to cash flow. As is evident from the example just given, cash flow forecasts are summaries of the actual cash transactions for a given fiscal period. Money deposited and money paid out are the only transactions that will be included in cash flow forecasts. Keeping this concept in mind will make converting information from accrual-basis operating budgets into information applicable to cash-basis cash flow forecasts a relatively simple task, particularly for smaller organizations.

D. Cash Flow Forecasting Based on the Operating Budget The process of creating cash flow forecasts from the operating budget will involve reviewing and characterizing each line item in the operating budget. Identifying, analyzing, and determining how each line item of the operating budget affects cash flow and also what month is affected will provide additional necessary information for cash flow forecast development. The steps in this process are described in the following subsections.

1. Reviewing the Operating Budget The first step in developing an accurate cash flow forecast is to review the organizational operating budget and assess the cash flow effect of each line item. To do this for your organization, you must figure out how each income or expense item will affect cash inflow or outflow. For example, rent expense must normally be paid on time or the organization will face legal action; thus rent expense will be a fairly straightforward cash outflow. However, organizations may also negotiate with vendors to pay some operating budget items over a longer period of time

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than would otherwise be allowed. Organizations that choose to finance such items will have to consider the effect of doing so in the cash outflow component of their cash flow forecasts. Decisions regarding renting versus purchasing equipment and buying real property outright versus obtaining a mortgage will have an impact on cash flow. Conversely, budgeted noncash items like depreciation and amortization have no effect on the cash flow forecast and, as described earlier, will be eliminated in the conversion of items from the operating budget for use in the cash flow forecast. Noncash items are always eliminated when converting expenses from an accrual basis to a cash basis. But in certain circumstances noncash items will still have an impact on cash flow. One example comes from government grant programs. These grant programs sometimes allow the grantee to charge depreciation, based on a specific formula, to the grant. As a result the organization’s cash inflow would go up, because a portion of the depreciation or usage charge is being funded as a cost of operating the program. Be aware of such contractual terms and take advantage of them when you can. After each line item in the operating budget has been analyzed, and the cash flow effect and timing have been determined, the organization may begin to prepare the cash flow forecast.

2. Adjusting the Operating Budget to Create the Cash Flow Forecast The second step in this process is modifying the information in the operating budget so that it can be incorporated into the cash flow forecast. The best way to approach this is to set up a worksheet modeled on Exhibit 22.2. The column farthest to the left contains the operating budget line items. The next column contains the expense amounts from the accrual-basis operating budget. The third column shows any cash-related adjustments to the operating budget amounts. The fourth column indicates the cash flow effect of the operating budget line item. When there is a direct relationship between an operating budget item and a cash flow forecast item, no adjustment will be needed to incorporate the amount into the cash flow forecast. Line items that have a cash flow effect may require adjustments to operating budget amounts in order to include them with accuracy in cash flow forecasts. For example, if your organization is acquiring new furniture at a cost of $60,000, and it is leasing that furniture over five years, cash flow will be affected for the five-year period (whereas if the organization pays for the furniture in one payment, that will affect cash flow only for the period in which the payment was made).

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EXHIBIT 22.2

Universal Nonprofit Worksheet to Prepare an Annual Cash Forecast for Fiscal Year 20x8 Budget Category

Accrual Budget

Adjustments

Personnel Consultants and Professional Services Materials and Supplies Facility Costs Specific Assistance to Clients Other Costs

$1,153,163 107,022

Total Operating Costs Capital Equipment

1,658,662 60,000

(135,185) (46,000)

$1,718,662

$(181,185)

Total Costs

$ (53,163) (82,022)

114,613 119,014 89,873 74,977

Explanation Accrued Compensation Deferred Payment Arrangement No Adjustment No Adjustment No Adjustment No Adjustment Equipment Financed

Cash Outflows $ 1,100,000 25,000 114,613 119,014 89,873 74,977 1,523,477 14,000 $ 1,537,477

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Prior experience and future expectations will determine the adjustments your organization will have to make to include operating-budget amounts in cash flow forecasts. Items such as rent, utilities, and salaries should all have a direct effect on cash flow and will usually not require an adjustment. Supplies, maintenance, and equipment purchases and similar line items may vary in their effect on cash flow, due to financing plans. Items such as depreciation and amortization will have to be flagged for elimination from the cash flow forecast unless reimbursable in some fashion from grant income, as discussed previously.

E. Reviewing and Approving the Cash Flow Forecast The annual cash flow forecast should be reviewed, and the beginning cash balance should be added to the net cash flow (cash inflow less cash outflow) to determine what the forecast year-end cash balance will be. Adjustments may have to be made to the planned cash payments for the year if the cash balances are too low. For example, your organization might decide to put off the purchase of a new computer system or decide to lease the equipment to conserve cash.

F. Short-Term Cash Flow Forecasting Short-term cash flow forecasts should be designed to meet your organization’s needs. Annual cash flow forecasts can be broken into whatever time periods will

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be most useful. Different sizes and types of organizations will benefit from different forecast frequencies. For example, a foundation with most of its assets in long-term investments may find that cash flow forecasts on an annual basis are all that it needs. An organization that receives diverse types of funding, such as funding from many special events or contribution sources, is likely to find that its cash flow forecasting is complicated and challenging and should be done more frequently. Cash flow forecasts should show both the beginning and ending cash balances. Each of these components of the forecast is essential to managing cash flow. They will help the organization monitor the cash balance and assist management in identifying excessive balances or potential overdrafts. Cash balances may vary widely during different fiscal periods as a result of seasonal volume fluctuations, weather, contribution patterns, and other factors. This is why preparing cash flow reports on a frequent basis is very helpful to ongoing cash flow management. As stated previously, however, your organization will need to assess its unique cash flow management needs to determine the frequency and detail of cash flow reporting that will be most beneficial. Our recommendation is that most organizations should, at the minimum, prepare a cash flow forecast every quarter, and this forecast should project a full year of forecasted cash flow transactions. The final step in cash flow forecast development is a thorough review of the forecast by both financial managers and operations managers. The timing and amounts of the cash flows should be examined and critiqued. If a draft cash flow forecast passes this review, the document may be finalized and any corrective action plans may be implemented.

G. Periodically Reviewing the Cash Flow Forecast In addition to review of the cash flow forecast by financial and operations managers, proper cash flow forecasting will require organizations to perform regular, periodic reviews of forecasts. Note that many organizations include cash flow forecasts in the financial package given each month to board members. Actual cash flow will almost never be exactly as anticipated, and the differences between the actual results and the projections must be assessed, evaluated, and incorporated into future forecasts. An analysis of the sources and uses of cash should be conducted on a regular basis to identify variances. This analysis should include an examination of changes in working capital (current assets less current liabilities), asset acquisitions and other capital expenditures, and the effects of any financing on cash flow forecasts. These reviews will provide your organization with a clear picture of its true current cash flow status. They might also help it assess how

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accurate its projection methodologies are and will reveal the precise nature of potential future cash flow problems. Periodic reviews should also involve recasting short-term cash flow forecasts to determine whether or not the annual forecast remains accurate and reliable. Those reviewing cash flow forecasts must assess whether variances will affect future cash projections. If it becomes apparent that future cash inflow projections are too high and no longer valid, the organization must take action to secure new sources of cash or to cut projects that draw on the organization’s cash (cash outflows). Management can take such specific actions as delaying an equipment purchase, making a request to current donors for additional funds, or restructuring operations. Monitoring overall economic and market conditions is also critical. For example, after the events of September 11, 2001, some nonprofits found their donations severely reduced, as donors retargeted contributions to September 11–related charities or issues. Some nonprofits will be affected as oil prices fluctuate. Nonprofits with large fleets of vehicles have been feeling a cash flow pinch due to unexpected gasoline costs. Housing organizations are being hit with large insurance, heating oil, and utility costs. Cash flow is a very pertinent topic and always needs careful attention. Cash flow forecast preparation might present an excellent opportunity for organizations to improve cash flow management. Cash flow forecasts reflecting monthly or weekly cash outflow and inflow can give important insights into the operating plan of the organization and the way that plan is affecting cash flow. However, the most important insight that a cash flow forecast provides is the expected amount of cash available at any given time during the forecast period.

H. Corrective Actions for Forecast Cash Shortages A nonprofit organization can pursue several corrective actions when a cash shortage is forecast. However, the first action that should be taken is to identify what will cause the projected cash deficit. Perhaps an equipment purchase was unwisely planned for a period of low cash inflow. When cash balances are low, nonessential purchases should be delayed to conserve cash. However, if greater operating expenses or falling support causes the projected cash shortage, the problem is more serious. The organization must identify the direct cause of the deficiency when forecast cash shortages are due to operational problems. The organization must also investigate and analyze cost drivers (objects or actions that drive costs above an expected amount) so that corrective action may be taken. Such analyses include reviewing materials and processes to determine whether any savings can be attained by using different materials or changing policies and procedures. A line of credit or an interim loan can be an acceptable solution for a short-term cash flow shortage. (Before borrowing money the organization must prove to the lender

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that it has the capacity to repay the amount borrowed plus interest.) However, without a corrective plan of action actually fixing the problem, the cash flow issue will return at a later date. The organization might also want to go to significant donors to ask for cash ahead of a normally scheduled date to ease the impact of poor cash flow. The organization must attempt to obtain advances and increase cash balances through any reasonable means while implementing adjustments to eliminate future cash flow shortfalls.

I. Cash Flow Reporting, Monitoring, and Analysis The key to maintaining your organization’s cash flow financial health is having the capacity to respond to changes in the environment. The nonprofit operating environment is dynamic, owing to both internal and external factors. Organizations must be able to recognize when it will be necessary to modify financial plans, budgets, and cash flow forecasts in response to the environment and to circumstances within the organization. Having formal mechanisms in place for such monitoring and modification will allow your organization to adapt to changes quickly and efficiently. The most important aspect of monitoring an organization’s financial health is being able to identify problems early in the cash flow financial cycle. The earlier your organization can identify areas of operations that will require attention or intervention, the more likely it is to correct problems before they cause substantial financial consequences. In order to do this monitoring effectively, data collection, analysis, and reporting must be maintained at a high level of accuracy and consistency. Those responsible for monitoring cash flow must receive the required information in a timely, clear, and complete manner. This section of the chapter focuses on the report monitoring aspect of cash flow management and on using reports to recognize and isolate potential threats to financial health. Effective cash flow management requires vigilance and flexibility: vigilance in being ever mindful of current and developing situations that might require corrective action and flexibility in being able to modify plans accordingly. Unfortunately, some finance professionals believe it is an admission of failure to redo a budget or cash flow forecast at the halfway point in a fiscal year. In reality there is nothing further from the truth. Revising budgets and cash flow forecasts in response to changing circumstances is essential to effective overall financial and cash flow management. Cash is not a theoretical concept. If your organization does not have cash available, it will go out of business. If your organization fails to meet a payroll because of its cash flow problems, staff morale and confidence in the organization will be seriously harmed. If your organization does not effectively manage cash and fails to pay rent, causing your landlord to start eviction proceedings, it will

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be hard to run your day-care or counseling center. If your office equipment supplier shows up at your headquarters in the middle of the workday to repossess your copier (this can actually happen), your organization will be severely inconvenienced. Forecasting cash flow must receive serious attention from the finance department, top management, and the board of directors. Cash flow forecasts are valuable to the extent that they are used. There are many ways to use these forecasts—in combination with the actual results from a financial period, to analyze the operation, and to uncover problem areas at the earliest possible time. One valuable type of cash flow report compares the forecast and actual cash flow by category, highlighting the variance (difference) between the two columns. This variance report helps management to focus on areas that missed the forecast by a significant margin, allowing managers and board members to take remedial action where it is necessary. In short, effective cash flow management requires the constant vigilance of all members of the organization. Adequate cash flow is critical to survival.

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Chapter 23

Monitoring and Modifying Approved Budgets WHEN USED IN CONJUNCTION WITH FINANCIAL REPORTS, approved budgets form the basis of an effective performance-monitoring system. An organization’s top and middle managers may compare approved budgets to actual financial reports to assess progress and monitor expenses. Regular comparisons will also help managers to identify income shortfalls, expense overruns, or operational problems early enough to take corrective action.

A. Regular, Timely Financial Reporting and Monitoring Program and unit managers should receive monthly reports on actual versus budgeted expenses and income for their areas of responsibility, and these reports should arrive on a timely basis. Timely basis means different things in different organizations. A useful guideline is to have the reports ready by the fifteenth day of the month following the reporting period. Organizations that cannot prepare reports on a timely basis will find it more difficult to manage their overall financial performance. Careful design of your nonprofit’s financial system should support timely reporting. These reports should identify variances from the budget. The program or unit manager should be asked to explain any differences beyond a specified percentage. The CFO is responsible for ensuring that such reports are prepared as part of the regular monitoring and evaluating of the nonprofit’s overall financial and operational position. The CFO must also prepare organization-wide financial reports, which are distributed to the CEO and the board for review and a decision on whether any follow-up action is required. The CFO’s review of individual program or unit financial reports should include following up with the responsible

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program or unit manager, as well as bringing problems to the CEO’s or the board’s attention as needed. Resource C contains a variety of examples of reports that compare actual to budgeted income and expenses, and it also offers worksheets for preparing such reports. Resource D provides exhibits and worksheets for analyzing financial reports, examining budgeted versus actual variances, and planning corrective action.

B. Planning and Taking Corrective Action The CFO and program and unit managers should work closely together to identify potential or emerging financial problems and develop action plans for correcting them. When variances from budgeted figures are identified early enough, relatively mild corrective action may be all that is needed: for example, postponing filling new or vacant positions, deferring nonessential purchases, increasing fees charged for services, looking for alternative sources of revenue, or restricting nonessential expenditures. When the budgeted-to-actual variance is large or is discovered late in the fiscal year, more severe action may be required, such as instituting a complete or partial freeze on hiring or purchasing (or both), delaying or reducing implementation of programs or services, or even laying off staff. It is important to act immediately when potential variances from budgeted income or expenses are found. Most problems only worsen over time, and delays in resolving them can lead to serious deficits, operational problems, and potential difficulties with funding sources and clients.

C. Modifying Budgets No budget can accurately predict all the circumstances that may affect a nonprofit. That is why it is important to develop and document policies and procedures for modifying the approved budget, both in-house and with external funding sources. Explicit policies and procedures will provide the flexibility needed to respond to changing circumstances while also maintaining proper financial controls. Some people feel a bias against the use of budget modification; they have a vague feeling that the practice is improper. However, budget modification is a proper, valuable financial planning tool when used appropriately. Modifying budgets in order to cover up an organization’s failure to properly plan, implement, or run its programs is not appropriate. Budget modifications are not explanations of past results; they are revisions to a financial plan used to manage future events based on new information or events.

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1. Reasons for Modifying an Approved Budget An organization-wide operating budget may contain income and expense estimates for an anticipated program that is never actually funded. This program’s estimated income and expenses should be removed from the budget. Conversely, funding for a new program may be acquired during the year, requiring budget modifications to include that program’s income and expenses. Finally, unanticipated changes in personnel or operations may require reallocating funds between categories or line items within a budget. For example, if functions previously handled by employees are contracted out, the budget should be modified by transferring funds from its salaries and wages account to its contract services account. Any obsolete staff positions should then be deleted from the budget.

2. Creating Written Budget Modification Policies and Procedures Policies and procedures for modifying budgets should be composed, written down, and distributed to all employees with program, unit, fiscal, or budgetary management responsibilities. Grant- or contract-funded programs frequently contain funding-source restrictions on making budget modifications and often require the nonprofit to obtain advance written approval from the funding source. Make sure that the document describing budget modification policies and procedures includes the need to comply with any such specific funding-source requirements. In addition, make sure the policies and procedures address the following components:

r

r

r

The preferred timing for in-house budget modifications. Allowing requests for inhouse budget modifications to be considered at any time can lead to confusion. Nonprofits may restrict the frequency and timing of internal budget modification requests, except for those necessitated by emergencies or major problems. Internal requests for routine modifications might be considered on a monthly, quarterly, or semiannual basis, depending on the size and nature of the nonprofit’s operations. The format for requesting in-house budget modifications. Budget modification requests should specify the account and line item to be modified, the dollar amount of the requested modification, and a brief rationale for the modification. Worksheet 23.1 contains a sample form for requesting budget modifications. The process for reviewing budget modification requests. Modification policies and procedures should clearly identify who is responsible for reviewing budget modification requests to ensure compliance with overall objectives, board policies and procedures, and any funding source requirements. Generally, budget modifications should not be used to establish expenses for a program, unit, or

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r

r

activity not previously approved by the board. In addition, each modification request should be reviewed to make sure that funds are available for transfer from one account or line item to another and that requests that would increase income and expenses are documented to ensure that income will actually be available. The approval authority for budget modifications. To ensure clarity and proper accountability, policies and procedures should clearly identify, in writing, the persons who have the authority to approve budget modifications. Some nonprofits assign approval authority based on the type of modification. For example, if the modification does not affect policy or programs, the approval authority may be at the program or unit manager level, with CFO or CEO review. Modifications that have policy or program implications may require board action. In addition, funding sources frequently stipulate advance written approval (by the funding source) for any budget modifications. The responsibility for follow-through. In addition to approval authority, budget modification policies and procedures should define the person responsible for following through on modification requests. This follow-through includes informing program managers of final decisions about modification requests and making sure necessary changes are made to the financial management and reporting systems.

WORKSHEET 23.1 Form for Requesting Budget Modifications for Current Fiscal Year Program or Unit: Date Reviewed:

Date Submitted: Action Taken: Date Acted On:

Requested Modification and Explanation

Funding Source(s)

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

By: By: For Current Budget

Requested Increase (Decrease)

Approved Increase (Decrease)

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D. Cash Flow Projections and Planning Chapter Twenty-Two explored the importance of cash flow to your organization. Cash flow analysis plays a critical role in the processes of monitoring and possibly modifying your budgets. To summarize our earlier discussion, cash flow refers to the relationship between the amount of cash an organization actually has available in the bank during a given period and the amount it needs to pay its bills during the same period. If there is more cash than there are bills, a nonprofit’s cash flow is considered positive; if more must be paid out than is on hand, cash flow is negative. Cash flow projections predict when cash will be received each month and compare the amount of cash expected with the amount of cash expenditures expected. Doing regular cash flow projections is as important to nonprofits as fundraising and operations budgeting are. Effective cash flow management requires regular ongoing attention—not just attention when cash flow problems develop. Otherwise, one day the nonprofit might not have enough cash in the bank to pay bills or salaries. The board and top management must identify projected periods of negative cash flow and plan specific actions to avoid shortfalls, so programs and services can continue without interruption. Exhibit 23.1 shows a sample cash flow budget for a small nonprofit.

1. Causes of Cash Flow Problems Having a cash flow problem does not necessarily mean that a nonprofit is operating at an economic deficit (although this could be the case). Nonprofit cash flow problems frequently are caused when cash is received later than it is needed, typically in one of the following situations:

r

r r

After-the-fact funding. Some grants or contracts reimburse the organization only after the fact (sometimes long after the fact) for rendering specific services; nevertheless the nonprofit has to pay for staff, office space, equipment, supplies, and other resources as part of ongoing operations. Approval coming late. Funding sources may approve existing programs for funding for the coming year weeks (or months) after the previous year’s funding has ended. Cash coming late. Funding sources may approve funding for a specific program to begin on a certain date but may not get around to providing the necessary cash until weeks or even months later.

To deal with problems like these, nonprofits must project and plan for adequate cash flow to meet regular expense obligations.

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EXHIBIT 23.1

Sample Cash Flow Budget for a Six-Month Period Month Annual Budget∗

January

February

March

April

May

June

Grants Contributions (fundraising) Dues

$320,000

$50,000

$0

$75,000

$0

$0

$75,000

150,000 70,000

0 35,000

0 15,000

0 10,000

0 1,000

0 1,000

75,000 1,000

Total Cash Received

$540,000

$85,000

$15,000

$85,000

$1,000

$1,000

$151,000

Payroll Consultants Space rental Equipment

$360,000 50,000 30,000 100,000

$30,000 8,000 1,500 5,000

$30,000 3,000 2,000 25,000

$30,000 2,500 1,500 5,000

$30,000 3,500 2,500 5,000

$30,000 2,000 1,500 10,000

$30,000 3,000 1,500 5,000

Total Cash Disbursed

$540,000

$44,500

$60,000

$39,000

$41,000

$43,500

$39,500

$40,500

($45,000)

$46,000

($40,000)

($42,500)

$111,500

$40,500

($4,500)

$41,500

$1,500

($41,000)

$70,500

Cash surplus (deficit) Cash balances at end of month ∗

Assumption is that opening cash is $0.

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

2. Using Monthly Projections for Planning Many nonprofits find that it is most effective to do cash flow projections for the coming fiscal year in its entirety and then to update monthly projections throughout the year. Monthly cash flow projections focus on the anticipated timing of cash receipts and disbursements, highlighting times when cash flow problems are likely to occur or when idle cash that can be invested is likely to be available. It is important in both yearly and monthly projections to make note of any months in which expenditures and receipts are nearly identical. Negative cash flow can occur at these times because actual expenditures and receipts will fluctuate somewhat from the estimates. Management and the board should plan far enough in advance of potential problem periods to allow for action to offset negative cash flow. Board discussions and decisions regarding cash flow problems should be reflected in meeting minutes, along with information on those responsible for carrying out board decisions and any follow-up reports required.

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3. Addressing Cash Shortfalls During months when negative cash flow is expected, nonprofits need to generate more cash, reduce cash outlays, or both. For instance, a projection may show that cash shortages are projected for the second and fifth months of the fiscal year. To compensate for this problem, expenditures from the first month on might be postponed and receipt of revenue might be accelerated. Potential options for addressing cash flow problems include the following:

r r r r r r r r

Postponing making major purchases, hiring new staff, or instituting wage increases Establishing payment schedules (installments) for costly items Moving up the dates of planned fundraising events Planning additional ways of generating funds Transferring funds from reserve accounts (if available and allowable under the rules governing these funds) Seeking cash advances from funding organizations Short-term borrowing Actually reducing expenses (not just cash outlays)

4. Some Possible Drawbacks These options for addressing cash shortfalls may also have negative consequences. For instance, loans require interest payments, as do major purchases that are acquired through installment payments. Postponing payments to vendors without their agreement may generate ill will and possible loss of credit (or denial of vendor services) in the future. Furthermore, when transferring funds from internal accounts, caution must always be used to avoid violating laws or contract obligations, especially when dealing with government or other restricted funds. Making major cost reductions is difficult at best but is fiscally responsible when no other viable alternative exists. In order to avoid loss of confidence among service recipients and funding sources, however, caution must be taken when reducing expenses. Once an organization has made major cuts in services, it runs the risk of earning a reputation for poor financial management. Nonprofits considering significantly reducing operations should discuss this with major funding sources to receive advice on other possible options.

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Chapter 24

Conclusion

BUDGETING FOR NONPROFITS should be dynamic, collaborative, creative, and appropriately respected. When budgeting is regarded in this way, the product and the process will be of equal benefit to your organization. By going through a systematic, cooperative, and integrated budgeting effort, your organization reaps the rewards of improved coordination and communication. These improved abilities will undoubtedly increase productivity and promote more effective problem solving. When the entire budgeting team operates from these perspectives, it is likely that the final product will serve the organization in many ways: as a monitoring tool, a planning tool, and a management tool. Budgeting is both a means to an end and an end in itself. The goal should not be simply to develop a well-conceived document named “Budget” that is either blindly adhered to or neglected in a file cabinet. Budgets should be consulted and monitored on a regular basis and modified when necessary. If it becomes clear as the budget year unfolds that the budget is not fulfilling its objectives, do not hesitate to modify it. Today’s volatile economic and political landscape demands flexibility in budgeting for successful organizations. Continuing to execute a plan that no longer works, simply because it is an “approved budget,” will not serve your organization’s best interests. Budgeting—effective budgeting, at least—is a process, a system, and an activity. Effective budgeting allows nonprofit organizations to employ limited resources better in order to meet their goals and thus to help the people and causes they serve. By developing and implementing a systematic budget and financial monitoring process, a nonprofit will make substantial strides toward fulfilling its mission. An effective budgeting process can also provide an opportunity for people both inside and outside the organization to have a voice in determining how available funds and human resources are used. An effective budget and budget process are

134

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road maps that guide everyone affiliated with the organization toward meeting its goals and objectives. Budgeting should emphasize and enhance your organization’s strengths. The annual goal-setting and budgeting process presents an excellent opportunity to review the organization’s successes and failures in all aspects of its operations. As well, the annual budgeting process provides an excellent opportunity to identify activities and programs that have been unexpected successes. Such surprises often represent key guideposts for future action. As you develop your organization’s budget, keep the following concepts in mind to guide the overall process:

r r r r r

Good budgets are truthful, authentic and accurate, and in alignment with the mission statement and strategic goals of the organization. Good budgets are collaborative and are prepared based on accurate historical financial information and thorough research. Good budgets should be adhered to, but they should also be modified when necessary. Good budgeting can become a basis for better understanding and cooperation throughout the entire organization. Good budgeting is not easy, but it is your best chance for success.

We always suggest that clients maintain a “budget idea” file. Use this file to keep track of issues or ideas that arise in the normal course of your operations during the year. You could keep this file on your computer so that employees can post ideas as they get them. You could also keep a paper file of articles and examples of budget ideas you have gleaned from other organizations or funding sources. Always remember that effective budgeting is a dynamic process that needs to be synchronized to your organization’s mission and goals. We hope the second edition of The Budget-Building Book for Nonprofits is proving to be a valuable tool for you, whether you are using it to get information on specific topics, to put in place a new budgeting system, or to revamp an existing system. The accompanying CD has budget-building software tools and spreadsheets that will help you in the budgeting process (see Resource G for more details).

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Part Three

Practical Budgeting Resources

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Resource A

Master Worksheet for Creating a Program or Unit Workplan TO CREATE A PROGRAM or unit workplan, perform the following actions: 1. Photocopy the following master worksheet for creating a program or unit workplan or use the Worksheet A.1 spreadsheet on the accompanying CD. 2. Tailor the phases and action steps to meet your specific program or unit goals. 3. Under “Responsibility,” identify those who are responsible for each phase and action step. 4. Under “Target Date,” fill in the planned completion date for each step. 5. Make sure that implementation of your finished workplan will result in achieving the specific program or unit objectives and priorities.

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Resource A: Master Worksheet for Creating a Program or Unit Workplan

WORKSHEET A.1 Creating a Program or Unit Workplan Some Tips on Creating a Program or Unit Workplan 1. Items followed by a [P] may be relevant when creating a program or unit workplan. 2. Items without a [P] after them must be taken into account in planning programs, but are probably inappropriate for inclusion in a program or unit workplan being submitted to a funding source as part of a proposal. 3. In assigning responsibilities, more than one person may be identified. 4. In selecting target dates, allow for realities (like dealing with bad weather or getting staff on board and up to speed). 5. Think ahead to the practicalities of implementation, and make the workplan specific, detailed, and realistic. This is particularly important when someone other than you will be responsible for carrying out the workplan.

Project Phases and Action Steps A. Receive Official Funding Approval Notification. 1. Review the award notice or contract carefully to ensure understanding of all conditions of award. [P] 2. After grant is received, prepare and place ads and recruit applicants for program or unit head. [P] 3. Prepare and place ads and recruit applicants for program or unit staff. [P] 4. Finalize job descriptions. B. Recruit, Interview, and Hire Staff. 1. Select interview team members, including representatives of key stakeholders. [P] 2. Screen applications. [P] 3. Schedule interviews and contact applicants. [P] 4. Conduct interviews and select person(s) to hire. [P] 5. Make offer to hire, negotiate as needed, and hire. [P] Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Responsibility

Target Date

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Project Phases and Action Steps C. Orient Newly Hired People. 1. Send letter of hire. 2. Schedule and conduct orientation meetings for newly hired people. [P] 3. Have program or unit head establish contact with appropriate funding source representatives if not previously involved in the grant application process. 4. Identify and subscribe to relevant publications. D. Train and Develop Staff. 1. Design, schedule, conduct, and evaluate any needed staff training. 2. Include staff of other programs as needed to support cross-training and collaboration. E. Arrange Facilities, Equipment, and Supplies. 1. Follow all bidding requirements and procurement policies and procedures. [P] 2. Identify amount of funds available. 3. Identify potential vendors. [P] 4. Purchase needed equipment and supplies. [P] 5. Seek satisfactory facilities. [P] 6. Negotiate with potential landlords. [P] 7. Agree on terms and sign leases. [P] F. Facilitate Intra-Agency Linkages and Working Relationships. 1. Identify other relevant in-house programs and activities. [P] 2. Review program goals, objectives, and designs with program staff. [P] 3. Determine mutual interests, functions, and roles. [P] 4. Plan and negotiate linkages and procedures. [P] 5. Create referral and collaboration procedures and forms. [P] 6. Create written record of agreed-on roles, linkages, and procedures. [P] G. Facilitate Interagency Linkages and Working Relationships. 1. Identify relevant outside agencies, programs, and activities. [P] 2. Initiate contact and review program goals, objectives, and design with them. [P] 3. Determine mutual interests, functions, and roles. [P] 4. Form advisory or coordinating groups. [P] 5. Plan and negotiate linkages and collaboration. [P] 6. Create referral and collaboration procedures and forms. [P] 7. Confirm with letters to create written record of agreed-on roles, linkages, and procedures. [P] 8. Identify other relevant organizations and meetings to join and attend. [P] 9. Identify in-house persons to maintain ongoing liaison with collaborating agency higher-ups. [P] 10. Identify in-house persons to maintain liaison with collaborating agency program or service representatives. [P] Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Responsibility

141

Target Date

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Project Phases and Action Steps H. Develop Evaluation Designs and Materials. 1. Identify funding source evaluation requirements. [P] 2. Identify in-house evaluation requirements. 3. Assign evaluation data gathering and analysis responsibilities. [P] 4. Identify evaluation standards for each goal and objective. [P] 5. Identify evaluation methods for each goal and objective. [P] 6. Identify evaluation data sources for each goal and objective. [P] 7. Develop needed evaluation materials. [P] 8. Create evaluation procedures and forms as needed. [P] 9. Integrate data collection and evaluation requirements with any existing database capabilities. [P] 10. Familiarize staff with program and financial evaluation requirements, procedures, forms, and responsibilities. [P] I. Set Up Record Keeping and Reporting. 1. Identify funding-source reporting requirements. [P] 2. Identify in-house reporting requirements. 3. Assign data gathering and reporting responsibilities. [P] 4. Create or revise record-keeping forms, procedures, and responsibilities as needed. [P] 5. Integrate data collection and record-keeping requirements with any existing database capabilities. [P] 6. Familiarize staff with record-keeping and reporting forms, procedures, and responsibilities. [P] 7. Begin data collection and analysis. [P] 8. Prepare and submit required monthly in-house reports. 9. Prepare and submit funding-source reports and other reports as required (specify report nature and timing). [P] J. Facilitate Outreach. 1. Identify target groups, their information sources, and locations. [P] 2. Develop program outreach plan and materials. [P] 3. Orient and train outreach personnel as needed. [P] 4. Conduct outreach activities and monitor results regularly. [P] 5. Review and revise outreach plan and activities as needed. [P] K. Prepare Public Information and Public Relations Plan and Materials. 1. Prepare and disseminate press release on grant award. [P] 2. Identify and plan for other public information and public relations opportunities within program. [P] 3. Implement plan (prepare press releases and press kits, gain coverage for events and set up photo opportunities, disseminate relevant publications and reports). [P] Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Responsibility

Target Date

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Project Phases and Action Steps L. Establish Program Monitoring and Control. 1. Program or unit head meets regularly with in-house supervisor to monitor progress against this program or unit workplan and specific program or unit goals. [P] 2. Identify, plan, and take corrective action as needed. [P] 3. Request any needed program or activity modifications in writing, including extension, if allowed and needed. [P] M. Establish Budget Monitoring and Control. 1. Prepare internal operating program or unit budget. 2. Disseminate operating budget as appropriate. 3. Program or unit head communicates regularly with finance staff about expenses, budget, and finances. [P] 4. Identify, plan, and take corrective action as required. [P] 5. Request budget modifications in writing as needed. [P] 6. Request carryover of funds, if allowed and needed. [P] N. Identify Any Other Major Activities, Objectives, or Milestones. 1. Identify specific action steps for carrying out or reaching each activity, objective, or milestone. [P] 2. Create or modify relevant policies and procedures as needed for program or unit services and activities. [P] 3. Identify and schedule access to needed outside services (for example, printing or consultants). [P] 4. Create needed materials. [P] O. Evaluate Program and Its Financial Performance. 1. Begin evaluation data collection and analysis. [P] 2. Prepare and submit required in-house evaluations. 3. Prepare and submit interim and final funding-source evaluations as required (specify evaluation nature and timing). [P] P. Carry Out Program Continuation Activities. 1. Identify in-house person to maintain ongoing liaison with funding-source higher-ups. 2. Identify in-house person to maintain liaison with funding-source program representative. 3. Plan for site visits by representative of current funding source. 4. Prepare and submit all in-house and funding-source program reports on time. 5. Prepare and submit all in-house and funding-source financial reports on time. 6. Regularly gather and analyze evaluation data. 7. Prepare and submit all evaluation reports as required. 8. Identify potential funding sources for program refunding and continuation or expansion. 9. Prepare and submit proposals for program refunding and continuation or expansion. 10. Negotiate with potential refunding sources as needed. [P] Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Responsibility

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Resource B

Worksheets with Sample Budget Formats

THIS RESOURCE PRESENTS eight worksheets that you can adapt for preparing budgets for specific types of departments and for capital projects. Worksheet B.6 offers an especially detailed generic form with instructions. The following formats are included: Worksheet B.1: Budget Format for a Community Services Organization Worksheet B.2: Expense Budget Format for a Museum Curatorial Department Worksheet B.3: Expense Budget Format for a Building and Security Department Worksheet B.4: Expense Budget Format for a Membership Department Worksheet B.5: Budget Format for a Museum Exhibition (or Other Special Event) Worksheet B.6: Blank Budget Form (with Instructions) Worksheet B.7: Format for a Capital Project Budget Worksheet B.8: Format for a Capital Budget for a Building

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WORKSHEET B.1 Budget Format for a Community Services Organization Amounts Revenue Revenue Sources

Total Revenue Expenditure Categories Salaries Employee Benefits Payroll Taxes Nonpayroll Insurance Professional Fees Supplies Telephone Postage Rent and Mortgage Utilities Building and Grounds Maintenance Equipment Rental and Maintenance Equipment Purchase Printing and Publications Travel Conferences, Conventions, and Meetings Membership Dues Awards and Grants Miscellaneous Capital Total Expenditures Revenue Over/(Under) Expenses

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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WORKSHEET B.2 Expense Budget Format for a Museum Curatorial Department Amount Expense Categories Salaries (Full-Time) Salaries (Part-Time and Interns) Consultant Services Benefits (Allocated) Office Supplies Printing Photography/Microfilm Binding Supplies and Services Conservation Supplies and Services Postage and Messenger Service Freight Dues, Subscriptions, and Publications Travel (Local) Travel (Conferences) Registration Fees and Meetings Travel (Research) Entertainment Photocopy Expense Telephone Equipment Furniture and Fixtures Miscellaneous Total Curatorial Department Expenditures Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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WORKSHEET B.3 Expense Budget Format for a Building and Security Department Amount Expense Categories Salaries (Full-Time) Salaries (Part-Time and Interns) Consultant Services Benefits (Allocated) Office Supplies Printing Photography/Microfilm Postage and Messenger Service Freight Dues, Subscriptions, and Publications Travel (Local) Travel (Conferences) Registration Fees and Meetings Entertainment Flowers Building and Space Maintenance Housekeeping Supplies Food and Beverage Supplies Photocopying Expense Telephone Utilities Equipment Furniture and Fixtures Gardening Construction Renovation Other Professional Fees Advertising Total Building and Security Department Expenses Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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WORKSHEET B.4 Expense Budget Format for a Membership Department Amount Expense Categories Salaries (Full-Time) Salaries (Part-Time and Interns) Consultant Services Benefits (Allocated) Office Supplies Printing Photography/Microfilm Postage and Messenger Service Freight Dues, Subscriptions, and Publications Travel (Local) Travel (Conferences) Registration Fees and Meetings Entertainment Flowers Bank Fees and Credit Card Expenses Photocopying Telephone Equipment Furniture and Fixtures Computer and Software Maintenance Advertising and Public Relations Total Membership Department Expenses Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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Resource B: Worksheets with Sample Budget Formats

WORKSHEET B.5 Budget Format for a Museum Exhibition (or Other Special Event) Exhibition Title:

Current Date: Amount

Exhibition Expenses Assembly and Dispersal Insurance Installation Materials Signage Wall texts Conservation Educational Programs Visitors’ information sheet Lectures Concerts Audiovisual production Gallery talks Special Fundraising Events Opening for sponsors Opening for supporters Dinner Publicity and Advertising Paid advertising Photography Press kits Banners Brochure Outdoor signage Posters Catalogue Author’s fee and expenses Printing and Design Per Diem and Travel to Openings Honorarium for Lecturers Contingency Total Exhibition Expenses Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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WORKSHEET B.5, Cont’d. Budget Format for a Museum Exhibition (or Other Special Event) Amount Exhibition Income Grants Admission Fees Catalogue Sales Poster Sales Donations Special Fundraising Events Fellows’ opening Friends’ opening Dinner Educational Program Fees Lectures (three) Concerts Rental of equipment Sale of products Gallery talks Total Exhibition Income Exhibition Surplus/(Deficit) Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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Resource B: Worksheets with Sample Budget Formats

WORKSHEET B.6 Blank Budget Form (with Instructions) (If the funding source does not provide a budget format, edit this form to create the desired budget format.) I. Personnel Costs A. Employee Salaries (Include number and title of position, percentage of time [working 100 percent is full time] and annual salary.) Administrative and Fiscal/Bookkeeping Staff $ Supervisory Staff Direct Service Staff Secretarial and Clerical Staff Other Staff (if applicable) Subtotal, Employee Salaries B. Employee Fringe Benefits (Include FICA, SUI, workers’ compensation, and any other fringe benefits, such as health insurance and pension.) For All Full-Time Employees For All Part-Time Employees Subtotal, Employee Fringe Benefits C. Consultants and Contract Services (List by functions or areas of expertise, such as medical, educational, psychiatric, psychological, legal, accounting, data processing, payroll preparation, and management services; number of hours or days of service needed; hourly or daily rate for each; and total amount for each.) Subtotal, Consultants and Contract Services Total Personnel Costs II. Other Than Personnel Costs A. Materials and Supplies (List items and amounts under each budget category.) Consumable Medical Supplies Consumable Program Supplies Consumable Vocational Supplies Consumable Recreational Supplies Consumable Laundry Supplies Consumable Housekeeping Supplies Consumable Office Supplies Food and Beverages (including number and cost of snacks and meals to be served to clients and staff) Subtotal, Materials and Supplies B. Facilities (Describe facilities and costs, including number, square footage, annual rent, and cost of maintenance and repairs of facilities needed to implement the program.) Facilities for Program Administration Facilities for Program Services and Activities Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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WORKSHEET B.6, Cont’d. Blank Budget Form (with Instructions) Facilities for Client Residences Facilities for Staff Offices Any Other Facilities Needed Subtotal, Facilities C. Insurance Needed for Program Facilities (Identify insurance needed for each facility or all of them; include amounts of coverage and annual premiums.) Subtotal, Facilities Insurance D. Specific Assistance to Be Provided to Clients (Describe the following amounts per client per month and the total for all clients for the year.) Allowances (Cash Payments) to Clients Personal Items (such as health and beauty aids for hygiene, clothing, personal appearance) Any Other Specific Assistance to Clients Subtotal, Assistance to Clients E. Travel and Transportation for Program Operations Costs of Transporting Clients (include nature, purpose, estimated mileage) Costs of Staff Travel (include nature, purpose, estimated mileage) Costs of Vehicles to Be Operated (include type, number, and uses) Costs of Vehicle and/or Travel-Related Insurance (include type and amount of coverage) Subtotal, Travel and Transportation F. Training, Conferences, and Meetings Training for Staff and/or Clients (include nature, purpose, hours/days, numbers of trainees) Staff Attendance at Meetings and Conferences (include nature, purpose, location, duration) Subtotal, Training, Conferences, and Meetings G. Membership Dues for Business, Professional, or Technical Organizations (Include organization names, number of memberships, and amounts of dues.) Subtotal, Membership Dues H. Subscriptions to Professional Publications (Include names or type and number of professional publications and annual subscription rates.) Subtotal, Subscriptions I. Other Insurance Needed for the Program (Include the kind of insurance and amount of coverage.) Subtotal, Other Insurance J. Miscellaneous Goods and Services Not Identified Earlier (Include the kinds of goods or services and their purpose or intended use in the program.) Subtotal, Miscellaneous Total Other Than Personnel Costs Grand Total, All Program Costs

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

$

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Resource B: Worksheets with Sample Budget Formats

WORKSHEET B.7 Format for a Capital Project Budget Capital Projects

FY 20x8

Safety and Environmental Compliance Strategic Initiatives Minor Equipment (less than $2,500/unit) Major Equipment (more than $2,500/unit) Major Construction Miscellaneous Improvements Contingency Totals

Total Annual Costs FY 20x9

FY 20x0

$

$

$

$

$

$

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

WORKSHEET B.8 Format for a Capital Budget for a Building Total Budget

Project Components Architectural and Engineering Design Building Construction Tenant Improvement Allowance Heating and Cooling Systems Property Management and Lease Negotiations Telephone Data System Contingency Totals

Expenditures to Date

FY 20x8 Budget

$

$

$

$

$

$

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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Resource C

Examples of Financial Reports for Analyzing and Monitoring Income and Expenses THE FOLLOWING EXHIBITS and worksheets are examples of financial report formats for analyzing and monitoring budgeted versus actual income and expense figures. Some are completed examples; others are forms for you to adapt and use. The variety of styles and the different degrees of detail and choices of emphasis in the following sample reports illustrate the many options available to you for analyzing and monitoring budgeted versus actual expenses. Exhibit C.1: Sample Three-Month Line-Item Financial Report Exhibit C.2: Sample Monthly Financial Report Exhibit C.3: Sample Quarterly Financial Report Exhibit C.4: Sample Budget Variance Report Exhibit C.5: Sample Management Report—Income and Expenses Exhibit C.6: Sample Management Report for Monitoring Administration Worksheet C.1: Budgeted Versus Actual Year-to-Date Income and Expenses for a Small Foundation (by Unrestricted and Temporarily Restricted Funds) Worksheet C.2: Budgeted Versus Actual Year-to-Date Income and Expenses for a Small Foundation (by Major Activities) Worksheet C.3: A Housing Development Corporation’s Revenue and Expense Report Worksheet C.4: A Housing Development Corporation’s Combined Real Estate Management Revenue and Expense Variance Report Worksheet C.5: A Housing Development Corporation’s Departmental Revenue and Expense Report

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EXHIBIT C.1

Sample Three-Month Line-Item Financial Report ABC Nonprofit Line-Item Report for the Three Months Ended March 31, 20x8∗

Support and revenue Grants Government funds United Way Fees Corporate gifts Other Total support and revenue Expenses Salaries and benefits Permanent staff Temporary staff Operating expenses Office supplies Telephone Rent Utilities Insurance Printing Postage Equipment rental Equipment and fixed assets Office furniture Computer equipment Other Memberships Staff training Consultant fees Publications Total expenses Excess (deficiency) of support over (under) expenses ∗

Approved Annual Budget

Current Month Actual

Year-toDate Actual

$43,000 0 23,000 2,000 11,500 8,650 88,150

$1,000 0 3,000 100 850 500 5,450

$7,500 0 5,000 500 5,000 4,500 22,500

67,080 4,000

2,785 626

6,406 1,440

2,000 1,800 2,400 1,800 2,000 1,700 1,350 900

112 78 200 461 104 92 51 76

258 179 460 1,060 239 212 117 175

300 1,500

200 0

460 0

120 0 700 0 87,650

10 0 211 0 5,006

23 0 485 0 11,514

$500

$444

$10,986

Fiscal year is calendar year.

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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EXHIBIT C.2

Sample Monthly Financial Report ABC Nonprofit Monthly Report for the One Month and Three Months Ended March 31, 20x8

Prior Year Actual

Approved Annual Budget

Revised Annual Budget

Current Month Actual

Year-toDate Actual

Support and revenue Grants Membership dues Corporate gifts United Way Other Total support and revenue

$50,000 50,000 100,000 65,000 25,000 290,000

$50,000 55,000 110,000 70,000 30,000 315,000

$50,000 100,000 115,000 50,000 25,000 340,000

$10,000 10,000 25,000 10,000 500 55,500

$30,000 30,000 50,000 30,000 1,500 141,500

Expenses Salaries Benefits Temporary staff Office supplies Telephone Utilities Printing Insurance Postage Equipment rental Equipment purchase Maintenance Consultant fees Total expenses

140,000 29,000 5,000 7,500 1,500 2,500 5,600 900 300 400 900 12,000 55,000 260,600

156,000 31,000 4,500 7,000 1,500 2,600 4,000 900 300 500 500 10,000 25,000 243,800

250,000 50,000 5,000 3,000 500 4,500 450 900 300 500 1,000 500 20,000 336,650

21,000 4,200 297 112 78 661 92 500 51 76 0 70 1,500 28,637

63,000 12,600 891 336 234 1,983 276 1,500 153 228 0 210 4,500 85,911

Excess (deficiency) of support and revenue over (under) expenses

$29,400

$71,200

$3,350

$26,863

$55,589

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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EXHIBIT C.3

Sample Quarterly Financial Report ABC Nonprofit Quarterly Report for the Period January 1, 20x8, to March 31, 20x8*

Support and revenue Grants Membership dues Corporate gifts United Way Other Total support and revenue Expenses Personnel Salaried staff Hourly staff Benefits Materials and supplies Office supplies Postage Printing Insurance Telephone Utilities Consultants Maintenance Equipment rental Other Total expenses Excess (deficiency) of support and revenue over (under) expenses ∗

Current Quarter Budget

Current Quarter Actual

Amount of Variance

Percentage of Variance

Year to Date

Approved Budget

$50,000 2,000 30,000 70,000 5,000

$50,000 1,500 27,000 70,000 2,000

$0 (500) (3,000) 0 (3,000)

0% −25 −10 0 −60

$50,000 10,000 90,000 70,000 20,000

$50,000 55,000 110,000 70,000 30,000

157,000

150,500

(6,500)

−4%

240,000

315,000

30,000 0 6,000

30,000 0 6,000

0 0 0

0% 0 0

130,000 4,500 16,000

156,000 4,500 31,000

1,000 500 2,500 500 300 200 0 400 2,500 5,000 48,900

1,000 450 2,700 400 250 200 0 400 1,500 2,500 45,400

0 50 (200) 100 50 0 0 0 1,000 2,500 3,500

0 10 −8 20 17 0 0 40 50 7%

5,000 450 2,700 400 1,250 1,200 15,000 8,100 5,500 5,500 195,600

7,000 1,300 4,000 900 1,500 2,600 25,000 10,000 7,500 7,500 258,800

$108,100

$105,100

($3,000)

−3%

$44,400

$56,200

Fiscal year ends June 30.

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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EXHIBIT C.4

Sample Budget Variance Report ABC Nonprofit Budget Variance Report for the Ten Months Ended October 31, 20x8

Annual Budget

Year-to-Date Budget

Year-to-Date Actual

Year-to-Date Percentage Variance

Year-to-Date Dollar Variance

Revenue Grants Fundraising Dues and fees Total

$320,000 150,000 70,000 540,000

$266,667 125,000 58,333 450,000

$220,000 75,000 54,000 349,000

−18% −40 −7 −22%

$(46,667) (50,000) (4,333) (101,000)

Expenses Personnel Supplies Services Equipment Total

360,000 50,000 30,000 100,000 $540,000

300,000 41,667 25,000 83,333 $450,000

275,000 45,000 25,000 90,000 $435,000

8% −8 0 −8 3%

25,000 (3,333) 0 (6,667) $15,000

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

159 $16,851

Excess (deficiency) of support and revenue over (under) expenses $29,790

73,250 8,288 4,693 2,279 3,254 7,919 4,730 4,983 831 6,683 530 368 85 562 118,455

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

115,000 23,000 13,000 3,000 4,000 14,500 8,000 8,500 1,000 5,000 2,000 2,000 0 1,000 200,000

Expenses Salaries Fringe Professional Travel Seminars Office Utilities and telephone Supplies and postage Insurance Printing Subscriptions Training Refunds Miscellaneous and contingency Total expenses

$124,403 12,355 8,327 3,160 148,245

$12,939

41,750 14,712 8,307 721 746 6,581 3,270 3,517 169 (1,683) 1,470 1,632 (85) 438 81,545

$(72,448) (1,645) 6,327 (840) (68,606)

Difference

$12,638

86,250 17,250 9,750 2,250 3,000 10,875 6,000 6,375 750 3,750 1,500 1,500 0 750 150,000

$147,638 10,500 1,500 3,000 162,638

Prorated Budget

$29,790

73,250 8,288 4,693 2,279 3,254 7,919 4,730 4,983 831 6,683 530 368 85 562 118,455

$124,403 12,355 8,327 3,160 148,245

Year to Date

$17,152

13,000 8,962 5,057 (29) (254) 2,956 1,270 1,392 (81) (2,933) 970 1,132 (85) 188 31,545

$(23,235) 1,855 6,827 160 (14,393)

Difference

$1,405

9,583 1,917 1,083 250 333 1,208 667 708 83 417 167 167 0 83 16,666

$16,404 1,167 167 333 18,071

Monthly Budget

$(8,362)

7,812 655 864 94 508 612 510 619 585 866 0 0 85 20 13,230

$3,450 1,150 18 250 4,868

Month to Date

$(9,767)

1,771 1,262 219 156 (175) 596 157 89 (502) (449) 167 167 (85) 63 3,436

$(12,954) (17) (149) (83) (13,203)

Monthly Difference

12:0

$196,851 14,000 2,000 4,000 216,851

Year to Date

September 3, 2007

Support and revenue Contributions Membership dues Conferences and seminars Interest Total support and revenue

Annual Budget

ABC Nonprofit Sample Management Report for Monitoring Income and Expenses for the Nine Months Ending September 30, 20x8

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Sample Management Report—Income and Expenses

EXHIBIT C.5

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160 $210,000 48,000 12,000 6,000 36,000 9,000 12,000 18,000 $351,000

$68,789 15,921 4,200 2,850 11,637 4,839 1,385 5,878 $115,499

$141,211 32,079 7,800 3,150 24,363 4,161 10,615 12,122 $235,501

$70,000 16,000 4,000 2,000 12,000 3,000 4,000 6,000 $117,000

Prorated Actual Budget 1/1/x8 to Balance 1/1/x8 to 4/30/x8 Remaining 4/30/x8

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Personnel Fringe benefits Consultants Travel Rent Supplies Rent, purchase Other TOTAL

Expenses

Annual Budget 1/1/x8 to 12/31/x8 $68,789 15,921 4,200 2,850 11,637 4,839 1,385 5,878 $115,499

$1,211 79 (200) (850) 363 (1,839) 2,615 122 $1,501

2% 0 −5 −43 3 −61 65 2 1%

$17,500 4,000 1,000 500 3,000 750 1,000 1,500 $29,250

$17,241 3,987 950 1,350 2,705 2,109 345 1,311 $29,998

$259 13 50 (850) 295 (1,359) 655 189 $(748)

Actual Budget Expenses Monthly 1/1/x8 to Dollar Percentage Month of Month of Dollar 4/30/x8 Variance Variance April x8 April x8 Variance

1% 0 5 −170 10 −181 66 13 −3%

Monthly Percentage Variance

12:0

ABC Nonprofit Management Report for Administration for the Period January 1, 20x8 to April 30, 20x8

September 3, 2007

Sample Management Report for Monitoring Administration

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Resource C: Examples of Financial Reports

WORKSHEET C.1 Budgeted Versus Actual Year-to-Date Income and Expenses for a Small Foundation (by Unrestricted and Temporarily Restricted Funds) Temporarily Restricted Funds

Unrestricted Funds Annual Budget Income Contributions Royalties Conference Registration Fees Publications Interest and Other Income Grant from ABC Foundation Total Income

Annual Budget

Actual

Actual

$

$

$

$

$

$

$

$

Program Expenses Conference Publications Awards Fund Development General and Administrative Expenses Internship Program Grants Total Program Expenses Excess Revenue over Expense Before Depreciation

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

162 $

$

$

$

$

$

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Excess Revenue over Expenses

Miscellaneous Expenses Total Expenses

Conference Meeting Expenses

Printing and Mailings Office Expenses

Books and Subscriptions

Membership and Dues

Professional Fees Development Costs Travel and Entertainment

Total Salaries and Benefits

Fringe Benefits at 24%

Program Expenses Salaries Payroll Taxes

Royalties from Publications Total Income

Registration Fees Interest and Other Income

Conference

Annual Budget

$

$

Year-toDate Actual

$

$

Annual Budget

$

$

Year-toDate Actual

$

$

Annual Budget

$

$

Year-toDate Actual

Administration

$

$

Annual Budget

$

$

Year-toDate Actual

Fund Development

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Income Contributions

Year-toDate Actual

Awards and Programs

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Annual Budget

Publications

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Conferences

Budgeted Versus Actual Year-to-Date Income and Expenses for a Small Foundation (by Major Activities)

WORKSHEET C.2

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163 $

$

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Excess Revenue over Expenses

Administrative Expenses Utilities Operating and Maintenance Taxes and Insurance Other Expenses Total Expenses

Expenses Personnel Salaries Fringe Benefits Total Salaries and Benefits

$

$

$

Total

$

$

Management Company 1

$

$

Management Company 2

$

$

Total

12:0

$

Management Company 2

Year to Date

September 3, 2007

Revenue Rental Income Management Fees Interest Income Other Investment Income Social Service Income Other Revenue Total Revenue

Management Company 1

Current Month

A Housing Development Corporation’s Revenue and Expense Report

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WORKSHEET C.3

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$

$

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Excess Revenue over Expenses

Administrative Expenses Utilities Operating and Maintenance Taxes and Insurance Other Expenses Total Expenses

Expenses Personnel Salaries Fringe Benefits Total Salaries and Benefits

$

$

$

$

$

Year to Date

$

$

Current Month

$

$

YTD Budget vs Actual

Difference

12:0

Revenue Rental Income Management Fees Interest Income Other Investment Income Social Service Income Other Revenue Total Revenue

Year to Date

Current Month

Actual

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Annual

Budgeted

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A Housing Development Corporation’s Combined Real Estate Management Revenue and Expense Variance Report

WORKSHEET C.4

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165 $

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Other Items Debt Service Capital Expenditures Total Other Items Total Expenses and Other Items Excess Revenue over Expenses $

$

$

$

$

$

Program C

$

$

Program D

$

$

Total

12:0

Administrative Expenses Utilities Operating and Maintenance Taxes and Insurance Other Total Expenses

$

Program B

September 3, 2007

Expenses Personnel Salaries Fringe Benefits Total Salaries and Benefits

Revenue Corporation and Foundation Grants Governmental Grants Marketing Fees Development Fees Partnership Management Fees Rental Income Management Fees Interest and Investment Income Fundraising Social Service Income Other Revenue Total Revenue

Program A

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General Funds

A Housing Development Corporation’s Departmental Revenue and Expense Report

WORKSHEET C.5

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Resource D

Tools for Analyzing Financial Reports and Planning Corrective Action AS YOU USE the tools in this resource, consider these tips for analyzing financial reports and planning corrective action. There are two basic ways to analyze most financial reports: 1. Actual versus budgeted. Compare the actual figures reported for the current period (month, quarter, or year to date) to the figures budgeted for the same period. 2. Same time this year and last year. Compare the actual figures reported for the current period to the actual figures reported for the same period a year earlier. Use both methods. Then take what you have learned from the comparisons to identify problem areas, set goals, and assign responsibilities and deadlines for carrying out corrective action. Caveat: do not forget to update cash flow projections at least six months in advance. A report that indicates a surplus or deficit does not tell you anything about how much cash is actually available for paying bills. You need to monitor cash flow separately, as detailed in Chapters Two, Eight, Twenty, and Twenty-Two. Please modify the following exhibits and worksheets to reflect the degree of detail your organization requires for specific budgeting processes and submissions. For example, some of the formats and information (such as the analysis of bad debts in Section VI of Exhibit D.1) may be too detailed for board-level review. However, much of the information in other areas, such as those explaining income and expenses, will be appropriately detailed for submission to the board, management, and financial staff. Regardless of how your nonprofit uses these tools, we

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suggest that it should examine and complete all material sections before starting next year’s budget. The tools in this resource are Worksheet D.1: Analyzing Financial Reports and Planning Corrective Action Exhibit D.1: Sample Analysis of Individual Line-Item Expense Variances (Budgeted Versus Actual) in Excess of $3,000 or of 3 Percent Worksheet D.2: Analyzing Line-Item Expense Variances (Budgeted Versus Actual) Exhibit D.2: Sample Analysis of Budgeted-Versus-Actual Expense Variances by Income Source Worksheet D.3: Analyzing Budgeted-Versus-Actual Expense Variances by Income Source

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Resource D: Tools for Analyzing Financial Reports

WORKSHEET D.1 Analyzing Financial Reports and Planning Corrective Action I. II.

Get copies of the same financial report for each of the periods you want to compare. Compare totals for the current and prior periods. Look for any changes in totals. A. Did total income  Increase?  Decrease?  Stay about the same? The actual change is  Plus $ or percent  Minus $ or percent B. Did total expenses  Increase?  Decrease?  Stay about the same? The actual change is  Plus $ or percent  Minus $ or percent III. Identify current and prior surpluses or deficits. Compare total income to total expenses. A. There seems to be a current  Surplus of $ .  Deficit of $ . B. The prior period shows a  Surplus of $ .  Deficit of $ . IV. Analyze current and prior income. A. Did the ratio of total income coming from specific sources change significantly between the prior and current periods?  Yes.  No. If yes, which ratio(s) changed? 1. The ratio of to changed from : to : . 2. The ratio of to changed from : to : . 3. The ratio of to changed from : to : . B. Look for any changes in individual sources of income: 1. Which income from which source(s) went up and by how much? a. Income from went up by $ b. Income from went up by $ c. Income from went up by $ d. Income from went up by $ 2. Which income from which source(s) went down and by how much? a. Income from went down by $ b. Income from went down by $ c. Income from went down by $ d. Income from went down by $ 3. Which income from which source(s) stayed about the same? a. Income from b. Income from c. Income from d. Income from

or or or or

percentage. percentage. percentage. percentage. or or or or

stayed about the same. stayed about the same. stayed about the same. stayed about the same.

C. Identify specific factors or circumstances that may have helped make income go up: 1. 2. 3. 4.

Income Source: Income Source: Income Source: Income Source:

went up because went up because went up because went up because

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

percentage. percentage. percentage. percentage.

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Resource D: Tools for Analyzing Financial Reports

WORKSHEET D.1, Cont’d. Analyzing Financial Reports and Planning Corrective Action D. Identify specific factors or circumstances that may have helped make income go down: 1. 2. 3. 4. E.

Income Source: Income Source: Income Source: Income Source:

Identify specific factors or circumstances that may have helped keep income about the same: 1. Income Source: 2. Income Source: 3. Income Source:

F.

went down because: went down because: went down because: went down because:

stayed about the same because: stayed about the same because: stayed about the same because:

Analyze the specific factors or circumstances you identified: 1. If the specific factors or circumstances you identified had been known as soon as they occurred, which ones could someone in your organization have done something about? Factor or circumstance What could have been done about it? By whom? a. b. c. d. e. f. g. h. i. j. k. l. m. 2. If the specific factors or circumstances you identified had been known as soon as they occurred, which ones could someone in your organization have done nothing about? Factor or circumstance Why could nothing be done about it? a. b. c. d. e. f. g. h. i. j. k. l. m.

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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WORKSHEET D.1, Cont’d. Analyzing Financial Reports and Planning Corrective Action V. Analyze current and prior expenses. A. Did the ratios of major expense categories change significantly when compared to each other?  Yes.  No. If yes, which ratio(s) changed? 1. The ratio of to changed from : to : 2. The ratio of to changed from : to : 3. The ratio of to changed from : to : 4. The ratio of to changed from : to : 5. The ratio of to changed from : to :

. . . . .

B. Look for any changes in individual expense categories: 1. Which expense categories went up significantly and by how much? a. Expenses for went up by $ b. Expenses for went up by $ c. Expenses for went up by $ d. Expenses for went up by $ e. Expenses for went up by $ f. Expenses for went up by $ g. Expenses for went up by $ 2. Which expense categories went down significantly and by how much? a. Expenses for went down by $ b. Expenses for went down by $ c. Expenses for went down by $ d. Expenses for went down by $ e. Expenses for went down by $ f. Expenses for went down by $ g. Expenses for went down by $ 3. Which expense categories stayed about the same? a. Expenses from stayed about the same. b. Expenses from stayed about the same. c. Expenses from stayed about the same. d. Expenses from stayed about the same.

or or or or or or or

percentage. percentage. percentage. percentage. percentage. percentage. percentage. or or or or or or or

C. Identify specific factors or circumstances that may have helped make expenses go up: 1. 2. 3. 4. 5. 6. 7.

Expense category Expense category Expense category Expense category Expense category Expense category Expense category

went up $ went up $ went up $ went up $ went up $ went up $ went up $

or or or or or or or

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

percent because: percent because: percent because: percent because: percent because: percent because: percent because:

percentage. percentage. percentage. percentage. percentage. percentage. percentage.

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Resource D: Tools for Analyzing Financial Reports

WORKSHEET D.1, Cont’d. Analyzing Financial Reports and Planning Corrective Action D. Identify specific factors or circumstances that may have helped make expenses go down: 1. Expense category 2. Expense category 3. Expense category E.

or or or

percent because: percent because: percent because:

Identify specific factors or circumstances that may have helped keep expenses about the same: 1. 2. 3. 4.

F.

went down $ went down $ went down $

Expense category Expense category Expense category Expense category

stayed about the same because: stayed about the same because: stayed about the same because: stayed about the same because:

Analyze the specific factors or circumstances that helped increase expenses: 1. If the specific factors or circumstances you identified had been recognized when they occurred, which ones could someone in your organization have done something about? Factor or circumstance What could have been done about it? By whom? a. b. c. d. e. f. g. h. i. j. k. l. m. 2. If the specific factors or circumstances you identified had been recognized when they occurred, which ones could someone in your organization have done nothing about? Factor or circumstance

Why could nothing be done about it?

a. b. c. d. e. f. g. h. i. j. k. l. m.

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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Resource D: Tools for Analyzing Financial Reports

WORKSHEET D.1, Cont’d. Analyzing Financial Reports and Planning Corrective Action VI. Analyze bad debts. What is the ratio of bad debts to income? A. Total bad debt is $ . Total income is $ . The ratio is B. Is this ratio too high, or is it acceptable?  Acceptable  Too high C. How do you know?

:

VII. Set goals for improvement. A. What specific goals would you like to reach? 1. Income? 2. Expenses? 3. Bad debts? B. What specific things have to be done to reach each goal? Goal Action(s) required 1.

By whom and when?

2.

3.

4. C. List the goals you plan to reach for any other specific items in this report: Report item Goal 1. 2. 3. D. What specific things have to be done to reach any additional goals? Goal Action(s) required By whom and when? 1.

2.

3.

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

.

173 3,360 3,570 0 1,520 13,770 3,540 1,540 0 2,450 0

6,000 7,000 2,000 2,000 9,000 3,000 1,000 25,000 5,000 10,000

(540) (540) 25,000 2,550 10,000

3,430 2,000 480 (4,770)

2,640

900 1,300 (4,100) 3,360 1,500 1,040 450 0

$8,000

Dollar Variance

(18) (54) 100 51 100

49 100 24 (53)

44

9 13 (82) 84 50 26 45 0

8%

Percentage Variance

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Variance Analysis

An additional staff person sent to conference. Dues paid primarily at start of year. No requests for grants to date. Expenditures uneven during year. Fundraising expenses for fall event.

Few repairs and rentals needed year to date. No equipment needed year to date. Expenditures uneven during year. Reduced during summer will reduce deficit.

Expenditures running below estimate (no snow to date).

To date, 2 positions vacant; to be filled in June. No raises yet given; amount will depend in part on union negotiations. Union/nonunion raises expected to average about 4 percent in July. To date, 2 positions vacant; expected to be filled in June. Variance causes same as for salaries. Large increase in malpractice insurance. Expenditures uneven during the year. Purchases uneven during the year. Surplus due to staff vacancies. Expenditures below projected year to date.

Note: Higher than budgeted expenses are in parentheses [”(82)”]. Lower-than-expected expenses are not [“8”]

9,100 8,700 9,100 640 1,500 2,960 550 30,000

10,000 10,000 5,000 4,000 3,000 4,000 1,000 30,000

$92,000

Year-to-Date Actual

12:3

Employee Benefits Payroll Taxes Nonpayroll Insurance Professional Fees Supplies Telephone Postage Rent Building and Grounds Maintenance Rent and Maintenance of Equipment Purchase of Equipment Printing and Publications Travel Conferences, Conventions, and Meetings Membership Dues Awards and Grants Miscellaneous Fundraising

$100,000

Year-to-Date Budget

September 3, 2007

Salaries

Line Item

Analysis Period:

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Sample Analysis of Individual Line-Item Expense Variances (Budgeted Versus Actual) in Excess of $3,000 or of 3 Percent

EXHIBIT D.1

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Resource D: Tools for Analyzing Financial Reports

Worksheet D.2 Analyzing Line-Item Expense Variances (Budgeted Versus Actual) Budget(s) Analyzed: Period Covered by Analysis: From

to

.

Date Analysis Done:

/ /

.

Guidelines 1. Include only line-item variances in excess of $ or percent in this analysis. 2. Put higher-than-expected variances in parentheses [“(82)”]; omit parentheses for lower-than-expected variances [“8”].

Line Item

Year-to-Date Budget

Year-to-Date Actual

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Dollar Variance

Percentage Variance

Variance Analysis

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Resource D: Tools for Analyzing Financial Reports

175

EXHIBIT D.2

Sample Analysis of Budgeted-Versus-Actual Expense Variances by Income Source Percent of Year Elapsed

Percentage of Funds Expended

U.S. Department of Education

25%

35%

Services being provided faster than planned. Monitor to avoid cost overrun.

U.S. Department of Health and Human Services

25

10

Two vacant positions; personnel costs and services behind schedule. Fill vacant positions.

Community Development Block Grant

25

71

Overstaffed by 3; funds to be totally spent by June. Transfer extra staff now.

State Housing Authority

25

3

Number of tenants served is way behind plan. Improve application processing.

ABC Foundation

25

11

Services restricted to first-trimester pregnant women. Speed up recruitment.

DEF Foundation

25

0

Source of Income

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Explanation of Variance and Action Needed

Got funds 2 months late; staff being interviewed. Get 3-month budget modification.

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Resource D: Tools for Analyzing Financial Reports

Worksheet D.3 Analyzing Budgeted-Versus-Actual Expense Variances by Income Source

Source of Income

Percentage of Year Elapsed

Percentage of Funds Expended

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Explanation of Variance and Action Needed

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Resource E

Example of a Detailed Organization-Wide Expense Budget THIS RESOURCE PRESENTS an organization-wide expense budget created for a nonprofit organization. The degree of detail represented makes this budget appropriate for presentation to most boards. Of course, depending on the organization, some boards require a more detailed budget, with all figures from program and unit budgets included. In addition to this sample organization-wide expense budget, you will find a worksheet for your use. Exhibit E.1: Sample Detailed Organization-Wide Expense Budget by Program Worksheet E.1: Detailed Organization-Wide Expense Budget by Program

177

178 52,791 13,158 53,331 28,747 14,629 30,583

13,159 8,994

$142,530

25,614 17,458 20,757 18,439 52,791 26,915 53,331 28,747 29,905 30,583 62,133

$24,465

17,866 142,530

Program 3 $4,426 412 2,879 5,027 8,940 2,781 24,465

$87,496 23,227 9,922 4,019

Program 2

$26,338 17,362

20,757

$523,281 35,191 43,608 41,257 54,714 14,705 712,756 69,189 $781,945

Program 1

$59,676 33,795

$1,153,163 107,022 114,613 119,014 89,873 74,977 1,658,662 69,189 $1,727,851

Total

62,133

15,276

13,757

18,439

5,225 3,585

$15,009 6,883

$436,143

$309,380 34,180 36,129 39,636 2,812 14,006 436,143

Program 4

$147,983

$86,858 1,737 15,169 23,555 16,571 4,093 147,983

Program 5

7,230 4,879

$18,329 9,550

$110,392

19,528 110,392

$74,292 10,405 2,708 3,459

Program 6

$84,393

$67,430 1,870 4,198 2,061 6,836 1,998 84,393

Program 7

12:4

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

40 40 40 40 40 40 40 40 40 40 40 40 40 40

Hours

September 3, 2007

Personnel Salaries 1 Chief Executive Officer 2 Bookkeeper 3 Admin. Assistant 4 Personnel Secretary 5 Acct. Secretary 6 Secretary 7 School Secretary 8 Program Manager 9 Social Worker 10 Clinical Supervisor 11 Social Worker 12 Social Worker 13 Social Worker 14 Exec. Director or Principal

A. Personnel B. Consultants and Professional Services C. Materials and Supplies D. Facility Costs E. Specific Assistance to Clients F. Other Costs G. Total Operating Costs H. Equipment (detail not shown) Total Costs

Budget Category

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Sample Detailed Organization-Wide Expense Budget by Program

EXHIBIT E.1

res-e Char Count=

179 $33,373 9,369 20,460 23,229 607 87,038 436,243 $523,281

43,512 87,113 2,249 223,431 929,732 $1,153,163

57,089 $436,243

16,616 17,708 16,082 20,497 22,113 19,550 10,808 41,784

$71,125 19,432

10,768 27,685 15,576 16,616 17,708 16,082 20,497 22,113 32,050 15,440 41,784 87,016 6,264 139,989 $929,732

11,728 75,768 $87,496

2,982 1,416 58

$5,796 1,476

9,915 $75,768

1,752 2,674 $4,426

69 495 132

$205 851

351 $2,674

2,323

Program 3

71,235 238,145 $309,380

13,262 34,769 487

$18,218 4,499

31,165 $238,145

8,012 4,632

10,768 27,685 15,576

Program 4

17,201 69,657 $86,858

2,695 7,266 423

$5,329 1,488

27,435 $69,657

37,734

4,488

Program 5

21,021 53,271 $74,292

2,322 13,883 216

$4,075 525

6,971 $53,271

6,312

Program 6

13,456 53,974 $67,430

1,722 6,055 326

$4,129 1,224

40,647 6,264 7,063 $53,974

Program 7

12:4

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

20 40 40 20 40 40 20 40 40 40 40 40 10

Total

Program 2

September 3, 2007

Personnel Fringes 1 FICA 2 SUI 3 SDI 4 Workers’ Compensation 5 Medical Insurance 6 Life Insurance 7 Pension Plan Total Fringes Total Salaries Total Personnel

15 Teacher 16 Teacher 17 Teacher Aide 18 Counseling Supervisor 19 Line Counselor 20 Line Counselor 21 Counseling Supervisor 22 Activities Counselor 23 Maintenance Supervisor 24 Maintenance 25 LPN 26 Clinical Psychologist 27 Child-Care Counselor 28 Overtime Total Salaries

Hours

Program 1

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Budget Category

EXHIBIT E.1, Cont’d.

res-e Char Count=

$28,442 13,769 5,040 2,017 9,242 1,398 467 3,373 43,836 7,029 $114,613

Materials and Supplies 1 Household and Maintenance 2 Office 3 Kitchen and Dining Room 4 Laundry 5 Education 6 Social Services 7 Recreational 8 Medical 9 Food—Clients 10 Food—Staff Total

180 $43,608

317 314 1,677 22,080 3,449 $9,922

$744 4,714 1,015

$23,227

$2,879

37 1,893

$912 37

$412

261

$151

Program 3

14 11,503 2,281 $36,129

9,242 13

$4,637 7,030 1,409

$34,180

336 1,560

7,309 1,462

$12,159 2,260 9,094

Program 4

$15,169

1,068 138 1,450 6,525

769 411

$4,808

$1,737

605

1,082 50

Program 5

971 $2,708

$361 1,376

$10,405

3,266 1,198

$5,941

Program 6

15 195 1,835 328 $4,198

96

$1,555 174

$1,870

260

1,044

$566

Program 7

12:4

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

1,050 1,560 2,501 $35,191

2,251 3,120 2,501 $107,022

2,101 7,857 2,146

$11,123

Program 2

September 3, 2007

$15,425 438 1,847 1,510

4,279 228

2,188 23,385

$29,940 4,448 32,479 2,101 19,737 4,806 5,361 278

Total

Consultants and Professional Services 1 Management Services 2 Psychologist 3 Psychiatrist 4 Legal 5 Audit and Accounting 6 Data 7 Internist MD 8 Pharmacist 9 Property Acquisition 10 Dietary 11 Joint Commission 12 Security Total

Hours

Program 1

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Budget Category

EXHIBIT E.1, Cont’d.

res-e Char Count=

181 23,023 15,985 $54,714

48,772 22,825 $89,873

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

$15,706

731 1,947 1,609 1,092 $41,257

$16,695 3,549 4,271 8,148 1,739 1,476

Program 1

$18,276

$65,291 6,289 8,038 20,126 2,619 3,181 145 2,099 3,831 3,046 4,349 $119,014

Total

$4,019

58 8 79 68 43

89 383

$3,291

Program 2

$8,940

6,462 840

$1,638

740 $5,027

140 13 168 127

1,099

2,740

Program 3

$2,812

2,812

2,984 4,917 49 1,075 119 551 797 1,102 221 $39,636

$27,821

Program 4

$16,571

11,004 5,456

$111

333 553 280 2,296 $23,555

195 4,304 647 232

$14,715

Program 5

$3,459

32 5 60 71 12

139 371

$2,769

Program 6

$6,836

5,471 544

$821

$2,061

177 268

360 904 184 168

Program 7

12:4

Specific Assistance to Clients 1 Allowance 2 Clothing 3 Recreation 4 Personal Hygiene 5 Vocational incentive Total

Hours

September 3, 2007

Facility Costs 1 Rental of Space 2 Depreciation and Interest 3 Heating Oil 4 Electric 5 Carpentry and Plumbing 6 Painting and Decorating 7 Grounds 8 Liability and Umbrella Insurance 9 Rubbish and Snow Removal 10 Electrical Repairs 11 Real Estate Tax Total

Budget Category

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EXHIBIT E.1, Cont’d.

res-e Char Count=

182 8 $2,781

1,010 $17,866

$14,705

293

1,635 1,516

1,622

7,339 2,962 84 2,518 $74,977

8 61 10

2,931 2,505 203 326

14 27

$1,932 428

Program 3

4,655 4,764 3,704 1,265

$783 2,281

Program 2

1,129 1,784 1,763

$8,435 4,648

Program 1

2,135 4,226 7,351

$20,678 13,296

Total

1,344 $14,006

1,411 472

496 743 73 675

430 1,684 802

$3,044 2,832

Program 4

$4,093

335

$2,897 861

Program 5

1,734 974 84 102 $19,528

1,015 1,221 3,418 264

547 716 4,786

$2,621 2,046

Program 6

54 $1,998

309

205 234

15 15

$966 200

Program 7

12:4

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Hours

September 3, 2007

Other 1 Travel and Transportation 2 Telephone and Leased Telephone Equipment 3 Training Conferences and Meetings 4 Dues and Subscriptions 5 Management Travel 6 Prof. Liability and Bonding insurance 7 Staff Recruitment 8 Staff Physical Exams 9 Staff Mileage, Auto Expense 10 Depreciation 11 Interest 12 Vehicle insurance 13 Postage 14 Community Relations 15 General Management Expense Total

Budget Category

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EXHIBIT E.1, Cont’d.

res-e Char Count=

183

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Total

Program 3

Program 4

Program 5

Program 6

Program 7

12:4

Personnel Salaries 1 Chief Executive Officer 2 Bookkeeper 3 Admin. Assistant 4 Personnel Secretary 5 Acct. Secretary 6 Secretary 7 School Secretary 8 Program Manager 9 Social Worker 10 Clinical Supervisor 11 Social Worker 12 Social Worker 13 Social Worker 14 Exec. Director or Principal

Hours

Program 2

September 3, 2007

A. Personnel B. Consultants and Professional Services C. Materials and Supplies D. Facility Costs E. Specific Assistance to Clients F. Other Costs G. Total Operating Costs H. Equipment (detail not shown) Total Costs

Budget Category

Program 1

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Detailed Organization-Wide Expense Budget by Program

WORKSHEET E.1

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Program 1

Program 2

Program 3

Program 4

Program 5

Program 6

Program 7

12:4

184

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Total

September 3, 2007

Personnel Fringes 1 FICA 2 SUI 3 SDI 4 Workers’ Compensation 5 Medical Insurance 6 Life Insurance 7 Pension Plan Total Fringes Total Salaries Total Personnel

15 Teacher 16 Teacher 17 Teacher Aide 18 Counseling Supervisor 19 Line Counselor 20 Line Counselor 21 Counseling Supervisor 22 Activities Counselor 23 Maintenance Supervisor 24 Maintenance 25 LPN 26 Clinical Psychologist 27 Child-Care Counselor 28 Overtime Total Salaries

Hours

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Budget Category

WORKSHEET E.1, Cont’d.

res-e Char Count=

Total

Program 4

Program 5

Program 6

Program 7

12:4

185

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Hours

Program 3

September 3, 2007

Materials and Supplies 1 Household and Maintenance 2 Office 3 Kitchen and Dining Room 4 Laundry 5 Education 6 Social Services 7 Recreational 8 Medical 9 Food—Clients 10 Food—Staff Total

Consultants and Professional Services 1 Management Services 2 Psychologist 3 Psychiatrist 4 Legal 5 Audit and Accounting 6 Data 7 Internist MD 8 Pharmacist 9 Property Acquisition 10 Dietary 11 Joint Commission 12 Security Total

Budget Category

Program 2

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Program 1

WORKSHEET E.1, Cont’d.

res-e Char Count=

186

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Total

Program 3

Program 4

Program 5

Program 6

Program 7

12:4

Specific Assistance to Clients 1 Allowance 2 Clothing 3 Recreation 4 Personal Hygiene 5 Vocational incentive Total

Hours

Program 2

September 3, 2007

Facility Costs 1 Rental of Space 2 Depreciation and Interest 3 Heating Oil 4 Electric 5 Carpentry and Plumbing 6 Painting and Decorating 7 Grounds 8 Liability and Umbrella Insurance 9 Rubbish and Snow Removal 10 Electrical Repairs 11 Real Estate Tax Total

Budget Category

Program 1

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WORKSHEET E.1, Cont’d.

res-e Char Count=

187

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

Total

Program 3

Program 4

Program 5

Program 6

Program 7

12:4

Other 1 Travel and Transportation 2 Telephone and Leased Telephone Equipment 3 Training Conferences and Meetings 4 Dues and Subscriptions 5 Management Travel 6 Prof. Liability and Bonding insurance 7 Staff Recruitment 8 Staff Physical Exams 9 Staff Mileage, Auto Expense 10 Depreciation 11 Interest 12 Vehicle insurance 13 Postage 14 Community Relations 15 General Management Expense Total

Hours

Program 2

September 3, 2007

Budget Category

Program 1

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WORKSHEET E.1, Cont’d.

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Resource F

Additional Useful Checklists and Examples

TO ROUND OUT your budget-building toolkit, this resource offers an exhibit that will help you craft the introduction to the budget package that will guide program and unit managers in preparing their draft budgets. Use the three worksheets presented in this resource when examining the effectiveness of your nonprofit’s mission statement and in establishing a formal process for requesting program and staffing changes during the budget review process. Exhibit F.1: Sample Introduction to the Budget Package Worksheet F.1: Checklist for Effective Mission Statements Worksheet F.2: Program Change Request Form Worksheet F.3: New Position Request Form

188

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189

EXHIBIT F.1

Sample Introduction to the Budget Package The Board of Directors of our organization met last year in June to review and discuss the short- and long-term trends affecting the future of our organization. One of the Board’s major conclusions was that, in order to preserve our financial viability, we must maintain programs most needed by our community in an efficient, low-cost manner. The budgeting process is a vital means of attaining this goal. The budget becomes more than just an annual spending plan when it is developed through a process that involves careful consideration of 1. Our mission 2. How that mission is translated into programs and services by the departments 3. The level of resources required to provide those programs and services efficiently and effectively In such a case the budget also functions as a long-range financial plan and operations guide. Thus, in its final form, the budget becomes an effective means of communicating our mission, goals, programs, and activities to our staff, community, and other interested parties. This budget package provides the necessary forms and instructions to complete departments’ operating budget requests for 20xx. The Overall Budget Process Phase I: The Budget Policy and Strategy Phase A. Our Mission Statement, established by the Board of Directors and management, sets the tone for budget development. It establishes the focus and direction for all programs and activities undertaken by our organization and departments. B. The Board and management may elect to establish specific, short-term policies for the budget year, such as placing increased emphasis on particular programs or services, setting guidelines for operating budgets, and identifying general revenue trends or constraints affecting us. C. The Budget Kickoff meeting will include a presentation of major policy initiatives, guidelines, and directives. At this time, departments can obtain general policy information and seek clarification of how policies may affect their particular departments. Phase II: Development of Budget Requests A. Within the context of our Mission Statement and established policy for the budget year, departments are asked first to review and evaluate their own individual goals and the programs and services required to pursue those goals. These goals may be reassessed and reprioritized by the department, based on current or projected needs or other conditions. B. Next, each department is required to prepare a thorough analysis and projection of all revenues expected for the budget year. C. Then, after careful consideration of the department mission, priorities for service, and available resources, each department is required to set specific and measurable objectives for the coming year and establish performance measures for each objective. D. The final step in developing the budget request is preparing the line-item expenditure budget. Each department is required to request the amounts it believes will be needed to support its proposed activities for the budget year. In addition, departments are required to provide detailed information on the justification and projected costs for any new or expanded programs or services and for any new positions requested in the budget. Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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EXHIBIT F.1, Cont’d.

Sample Introduction to the Budget Package Phase III: Budget Review A. All department budget requests are reviewed by the Finance Department. Department staff are responsible for identifying major issues and new or expanded programs in their budgets. In the event that further information or clarification is needed, appropriate staff members of the departments will be contacted, and written clarification may be requested. B. All draft budgets are reviewed. A meeting will be held with each department to discuss the draft budget, answer questions, and provide any additional information or supporting documentation that department staff believe necessary to explain and justify their budget fully. Follow-up meetings may be held if required. Phase IV: Budget Approval A. At the conclusion of all budget meetings with department representatives, the final allocation decisions are made, and the recommended budget is presented to the Finance Committee. B. The Committee reviews recommended department budgets and forwards the final recommended budget to the Board of Directors for final approval. Phase V: Budget Dissemination A. After Board approval, each department receives a copy of its approved budget. B. If departments have any questions concerning changes made to their requested budgets in the course of the review process, they should contact the Finance Department. Phase VI: Budget Monitoring A. The approved expenditures and revenues budgeted and objectives set for each department form the basis of a system to monitor department performance and report variances of actual experience from budgeted amounts during the course of the year. B. Department staff should monitor actual revenues and expenditures versus budgeted revenues and expenditures on a monthly basis. C. Quarterly reports identifying budgeted versus actual variances are prepared by the Finance Department and distributed to departments for review and feedback. At times the Finance Department may be directed to prepare monthly reports. D. In the case of revenue projected to be under budgeted amounts or expenditures projected to exceed budgeted amounts, a departmental plan for corrective action is required, stating what actions the department will take to increase actual revenues or decrease the rate of expenditures. Corrective action plans are also required if monitoring indicates that stated objectives may not be attained during the year. Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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191

WORKSHEET F.1 Checklist for Effective Mission Statements If you can agree with each of the following statements, the odds are that your nonprofit is on the right track when it comes to developing, using, and updating its mission statement: 1. Our nonprofit has a written mission statement. r It is brief (no more than three clear sentences). r It emphasizes what our organization wants to accomplish overall (its reason for existence). r It avoids emphasizing how we intend to carry out our mission (specific activities, methods, goals, and programs). r It avoids jargon and overly fancy language. r It is clear, concise, and understandable to people inside our organization. r It is clear, concise, and understandable to potential funding sources and donors outside our organization. r It seems realistic, believable, and doable to people inside and outside our organization. 2. Board, management, staff, and volunteers were involved in developing our mission statement. r Board, management, staff, and volunteers agree with it. r They understand it and can summarize it accurately in conversation. 3. Our mission statement is referred to frequently within our organization. r We use it to guide planning, goal setting, and program development. r Board, management, staff, and volunteers refer to it and regularly use it as a touchstone when they plan and make decisions. 4. Our mission statement is regularly reviewed in relation to our organization’s programs and actual accomplishments. r Board, management, staff, and volunteers are involved in reviewing it. r It is updated or modified as needed. r Board, management, staff, and volunteers are involved whenever it is updated or modified. 5. After reading our mission statement, everyone can tell what our nonprofit’s unique mission is all about. Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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Resource F: Additional Useful Checklists and Examples

WORKSHEET F.2 Program Change Request Form This form gathers detailed information on new programs or substantial changes to existing programs. Please complete a separate form for each new program and for each change to an existing program requested in the budget. 1. Program title. Enter the name of the program, and indicate whether it is a new program or a change to an existing program or service. 2. Program summary. Provide a brief summary of the nature and purpose of the program or change and document the need for the program or change. 3. Anticipated benefits and outcomes. Identify the specific positive benefits or outcomes expected from the program or change. These could include r Cost reductions or revenue enhancements (or both) r Improved client services r Other outcomes that will contribute to the overall success of our organization 4. Three-year incremental revenues and incremental expenses. Provide an estimate of the revenues and expenditures associated with the program or change over a three-year period: r Revenues and expenditures must be stated incrementally (that is, in terms of amounts in excess of the current year’s budgeted revenues or expenditures). r Revenues must be specifically identified (by source and amount) and verifiable. r Expenditures must accurately reflect the total cost of the new program. 5. New positions and capital equipment. Identify any new positions or capital acquisitions required in conjunction with the new program or change to an existing program. ABC Nonprofit Budget Request for New Program or Change to Existing Program Department: Prepared by: Title: Program Title:

Date: Telephone:

 New Program

Effective date:  Change to Existing Program

Program Summary and Needs Analysis

Anticipated Benefits and Outcomes

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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Resource F: Additional Useful Checklists and Examples

WORKSHEET F.2, Cont’d. Program Change Request Form Fiscal Impact INCREMENTAL REVENUES 1. 2. 3. 4. Total Revenue INCREMENTAL EXPENDITURES 1. Salaries and Wages 2. Fringe Benefits 3. Supplies 4. Capital Equipment Total Expenditures

FY 1

FY 2

FY 3

FY 1

FY 2

FY 3

New Positions Required (Complete Worksheet F.3 – New Position Request Form) 1. 2. Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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Resource F: Additional Useful Checklists and Examples

WORKSHEET F.3 New Position Request Form Department: Prepared by: Title:

Date: Telephone:  Union

Position Title: Total Hours:

 Non-Union Effective Date: Cost Center:

Describe the tasks and responsibilities of the requested position.

Demonstrate the need for the position, including relevance to the organization’s mission and strategic plan. Use relevant workload statistics or other documented evidence of the need for the services to be provided.

Indicate the Fiscal Impact. INCREMENTAL REVENUES 1. 2. 3. 4. Total Revenue INCREMENTAL EXPENDITURES 1. Salaries and Wages 2. Fringe Benefits 3. Supplies 4. Capital Equipment 5. Other Total Expenditures

FY 1

FY 2

FY 3

FY 1

FY 2

FY 3

Copyright C 2007 by John Wiley & Sons, Inc. All rights reserved.

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Resource G

Tools on the Accompanying CD

THIS SECOND EDITION of The Budget-Building Book for Nonprofits includes a CD containing some valuable tools for you to use as you implement the book’s concepts in your organization.

Exhibits and Blank Worksheets All of the exhibits and worksheets displayed in this book are available on the CD as Excel spreadsheet (.xls) files or as Word document (.doc) files. Refer to the exhibit or worksheet name in the book to locate the corresponding file on the CD.

Application Software The CD also contains the CMS Nonprofit Budget Builder. This software product is a Windows application designed specifically to help you implement some of the concepts in this book. Starting with the organization program or unit as the foundation, the software will help you organize and track each program’s team members, goals, goal workplans, and budget. All of the information is organized for you automatically, and it is available for review on the screen or as a report to be printed out. The software comes with a standard chart of accounts (COA). You can use this COA as the basis of your budgeting work, or you can replace it with a COA of your own design. It is easy to expand the chart by adding new entries to meet your needs. Each member account in the COA can have an unlimited number of line items; the sample data contains an example or two for every revenue and expense account. The first step in the budgeting process is to add new line items as needed; a line item is the basic unit of each budget, and you’ll need to customize the line

195

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Resource G: Tools on the Accompanying CD

items accordingly. For example, the COA account number called “office supplies” could have many line items, including toner, copier paper, and file folders. The software has the following features:

r r r r r r r r r r r

You can create any number of programs or units. Each program can have any number of team members. Each program can have any number of goals. Each goal can have a workplan with any number of action steps. Each program has a budget with any number of line items. It comes with a suggested chart of accounts structure for your use, but you have the ability to modify the chart of accounts or completely eliminate it and use a COA of your own design. Each account number of the chart of accounts can have an unlimited number of line items—specific budget expenditure items that you can create and use. The software has a small footprint—it doesn’t require a powerful computer, it doesn’t require a large amount of disk space, and it runs on any version of the Windows operating system from Win98 to the current version. It comes with a built-in uninstall procedure that allows you to easily remove the software from your computer if necessary—simply use the Add or Remove Programs utility located in your Windows Control Panel. It is network compatible and designed specifically to be a multi-user application; all users on your local area network can access the information at the same time. The installation procedure places all files in a single folder on your system, and no changes are made to your system’s registry.

The CMS Nonprofit Budget Builder comes with a small amount of sample data to help you understand the program’s functions and procedures. This sample data is easily eliminated to allow you to use the software in your organization. There are two versions of the CMS Nonprofit Budget Builder. The standard version comes on the CD provided with the book; Jossey-Bass sells a premium version for a nominal fee (for more information, go to www.josseybass.com). The two versions work exactly the same way, but the premium version offers you the ability to export your data to other formats (such as spreadsheet files, PDF documents, and XML files). You can upgrade to the premium version at any time. There are four files on the CD: 1. bbbnp book install.exe. This is the actual installation program, which places a working copy of the CMS Nonprofit Budget Builder software in the disk folder of your choice. 2. bbbnp Help.exe. This program will display the software’s help file without requiring you to first install the application.

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Resource G: Tools on the Accompanying CD

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3. bbbnp.chm. This is the compiled HTML version of the software’s help file. 4. bbbnp.pdf. This is the help file in a PDF format, complete with index. 5. http://www.dropkin.com/bbbnp/index.html. This is the help file in Flash format, complete with index. Take the time to read the help file, using any one of these last three files, before you install the application. Technical support for the software is available only by e-mail. Write to [email protected], and we will try to answer your questions promptly.

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JWSF002-Dropkin

September 3, 2007

12:6

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JWSF002-Dropkin

September 6, 2007

19:45

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How to Use the CD

System Requirements PC with Microsoft Windows 98SE or later Mac with Apple OS version 10.1 or later∗

Using the CD With Windows To view the items located on the CD, follow these steps: 1. Insert the CD into your computer’s CD-ROM drive. 2. A window appears with the following options: Contents: Allows you to view the files included on the CD. Software: Allows you to install useful software from the CD. Links: Displays a hyperlinked page of websites. Author: Displays a page with information about the author(s). Contact Us: Displays a page with information on contacting the publisher or author. Help: Displays a page with information on using the CD. Exit: Closes the interface window. If you do not have autorun enabled, or if the autorun window does not appear, follow these steps to access the CD: 1. Click Start → Run. 2. In the dialog box that appears, type d:\start.exe, where d is the letter of your CD-ROM drive. This brings up the autorun window described in the preceding set of steps. 3. Choose the desired option from the menu. (See Step 2 in the preceding list for a description of these options.)

199

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JWSF002-Dropkin

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September 6, 2007

19:45

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How to Use the CD

In Case of Trouble If you experience difficulty using the CD, please follow these steps: 1. Make sure your hardware and systems configurations conform to the systems requirements noted under “System Requirements” above. 2. Review the installation procedure for your type of hardware and operating system. It is possible to reinstall the software if necessary. To speak with someone in Product Technical Support, call 800-762-2974 or 317572-3994 Monday through Friday from 8:30 a.m. to 5:00 p.m. EST. You can also contact Product Technical Support and get support information through our website at www.wiley.com/techsupport. Before calling or writing, please have the following information available:

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Type of computer and operating system Any error messages displayed Complete description of the problem It is best if you are sitting at your computer when making the call.

Please note that technical support for the CMS Nonprofit Budget Builder software is available only by e-mail. Write to [email protected], and we will try to answer your questions promptly. ∗

Note: Mac users may not be able to operate the CMS Nonprofit Budget Builder software.