The budget is a basic building block in a strong financial foundation nonprofit organizations need to realize their vision. This is truer than ever before because increased scrutiny from the public and donors and increased competition for revenue has increased the need for accurate budgets that tie the organization’s goals and strategies to its finances.
Many nonprofits struggle with inadequate budgets that take up valuable Board time, create uncertainty about activities and outcomes for the year, don’t effectively communicate financial priorities and needs, and cause frustration for staff, all of which hurt their opportunities for growth.
The main causes of these budget failures are a lack of leadership skills necessary to guide an effective budget process, the lack of technical knowledge and tools needed to capture all the details in appropriate format and the failure to devote adequate time and input required to write an effective budget.
Leadership in the budget process begins with the development and dissemination of a clear agenda, timeline, and instructions for completing the budget. The instructions should remind everyone of established goals and strategies and the need to address these in their budgets. They should also remind people not to implicitly change any existing policies or process such including pay increases or new grant revenue which require explicit approval. The timeline and agenda should allow plenty of time and lay out specific dates by which those involved in the process need to complete specific tasks.
Budget leadership continues throughout the process by making sure everyone has the information they need and someone to turn to when they have questions. Prior year budgets and 12 month actual results are a good starting point for building a budget and organization priorities and decision processes may need to be explained. Frequently questions about how to budget specific revenue and expense items will come up. And of course leadership insures deadline are met through friendly reminders and prodding when necessary.
Another reason budget fail to be a strong tool for growth is that the organization lacks the technical knowledge and tools needed to write an effective budget. Nonprofit organization are complicated and their budgets mirror this complexity. There are multiple programs, multiple revenue sources, cost allocations, revenue sharing, operating vs. capital expenses and the need for cash flow planning. There is a tremendous amount of detail involved and the organization needs the right tools and someone that know how to manage them to capture and organize this complexity.
Adding to the complexity are the many different reporting needs including managing individual programs and activities, communicating budget vs. actual results to the Board of Directors and communicating goals, strategies and needs to donors. To meet these needs the budget needs to contain multiple levels of detail and multiple formats.
Finally budgets often fail to be a strong tool for growth because they are not given adequate time and input. A thorough budget process can take three months or more and should include selected program managers, the Executive Director, finance personnel, the Treasurer, the Finance Committee and the Board of Directors. Writing the budgets, compiling them, reviewing them and revising them is a lengthy process but when given adequate time and input the final budget will be more accurate and will have the support and commitment of everyone involved and will make the approval by the Board much easier.
The budget is a foundational tool in a strong nonprofit organization and a good budget is more important now than ever before. Given adequate leadership, tools, knowledge, time and input the budget can be a valuable tool connecting the organization’s day to day activities to its broader strategies and goals and it can guide these activities throughout the year. This is an important tool for the Board but more importantly it demonstrates to funders that the organization cares for their dollars and connects those dollars to specific outcomes.