e-Newsletter: Connect to Solutions
Staying on Track Financially: Budgeting & Financial Management
by Susan Griffin, Director of Operations, Center for Nonprofit Excellence
Many nonprofits, already running a very lean ship for the past few (or more) years, have found that it is even more difficult to stay in the black, or get out of the red, in today’s economic environment. And too many Executive Directors, especially those in small organizations without the benefit of a Finance Director or CFO, find themselves struggling alone since financial management, not oversight, is often considered the responsibility of staff. The board reviews the financials on a monthly or quarterly basis, but it takes more frequent vigilance of cash flow reports and development of ever changing contingency plans to stay on the financial track required to meet mission.
So how can nonprofits handle this increasingly complex aspect of the work? What financial information should be tracked to anticipate problems before they arise, and who should be involved in this process so the right people are considering all the options when a financial decision must be made? The answers lie in several financial tools.
Annual Operating Budget
In many organizations, budgeting is still a process kept under wraps and only a few select staff are involved or privy to the details. In reality, more open information helps staff both understand the organization’s financial demands as well as provide more realistic information based on their program or management responsibilities and experience. Understanding that “Personnel” is often the largest line-item in most nonprofit budgets may increase awareness of the choices that have to be made.
A nonprofit’s budget should reflect what the organization is actually doing in this fiscal year, and not be a wish list of revenues and un-researched expenses. The assumptions should be linked to past performance and realistic projections.
Also, remember to include a monthly comparison of budget to actual expenses and address all variances. There should be a distinction between fixed and variable costs, and a policy / strategy to deal with a financial situation that begins to veer from the budget – both positively and negatively. The budget should be completed and approved by the board before the start of each fiscal year.
Questions to Consider
1. Does our annual operating budget address our organization’s strategic plan?
2. Does our annual operating budget build in the development of revenue streams and related expenses to fit projected programs / services that will be in the development stage this year?
3. Who besides the Executive Director / CEO should be involved in the budgeting process to ensure the budgets reflect realistic information?
Capital Budgets
Capital budgets for equipment, facilities and significant repair or maintenance costs are not generally part of the annual operating budget, but an additional component through which cash needs and disbursements are identified as well as changes to depreciation determined. While few nonprofits actually “fund” depreciation, it’s important to know what it might cost to replace or repair your building, equipment, buses, etc., and to plan for that eventuality.
Questions to Consider
1. What capital expenditures are needed this year? Over the next three years?
2. What is our strategy for ensuring we have enough money to cover these expenses?
Contingency Budgets
Contingency budgets can help you make rational decisions when a crisis occurs, because the discussions and decisions have been made beforehand. These alternative budgets usually have more detailed assumptions included so that everyone remembers why the decisions were made and what the framework was for the computations.
Contingency budgets can be for downturns as well as budget increases. If your organization has applied for a large grant, or perhaps federal Stimulus funding, it may help to develop a more detailed contingency budget that addresses all of the potential impacts.
Questions to Consider
1. What are 2-3 realistic scenarios that would impact the services our organization offers and how they are delivered?
2. How would our operating budget change for each scenario?
3. What are the triggers or criteria needed to move from one contingency budget to another?
Cash Flow Budgets
Nonprofits budgets no longer have to be “balanced” or net zero at year end, although some public funding requires all expenses related to the project to be incurred at the end of the grant / budget cycle. Now most nonprofits produce financial reports on an accrual basis, but it’s still essential to track cash flow as well.
Because much of an organization’s revenues are restricted – to a certain period, for a specific program – just looking at cash can hide how much money is really available, but it is necessary to know if you will be able to meet your obligations. You may need to establish a cash reserve to deal with the increasing lag in payments from public funding sources. Three months has been a rule of thumb for smaller organizations, but more may be needed to manage revenue and expense cycles.
Question to Consider
1. Do we have a clear picture of our cash flow so that there will be enough cash on hand each month to meet our obligations?
Financial Trends
Make time to identify long-term trends that might not be apparent in a single year. It’s also important to scan for external trends, such as the decrease in foundation giving due to the market downturn in late 2008. For foundations that base their giving on a 12-quarter rolling average, the low point will not occur until 2011. Staying in contact with your primary contributors will help your organization prepare for changes that are outside of your control. Other, non-financial data may also indicate future trends that have a financial impact. This includes increase or decrease in memberships, the number of donors, attendance at special events, and participation in services.
Question to Consider
1. What are 2-3 trends likely to affect our organization’s financial stability in the next year? Three years?
Staff & Board Involvement
It is important to have people involved who can tolerate some financial uncertainty, think creatively under pressure, and understand and commit to the organization’s mission.
Be sure there is someone on staff or under contract that can provide solid financial data based on GAAP and nonprofit accounting practices. Nonprofit accounting differs in many ways from for-profit accounting, so board members may also need some training / review on how financial reports are developed, and how specific contributions and expenses are handled. Depending on the revenue streams, the organization must also have the ability to manage foundation grants, public funds and individual contributions in the proper accounting methods.
With recent changes to IRS regulations there must be a board member who has “financial expertise”. The board must take the lead in hiring the audit firm when needed, it must hear the presentation of the audit before acceptance and it must review the Form 990 before it is submitted to the IRS. All of these actions should be documented in board minutes. And while board members need to understand the financial statements, keeping the focus on the relationship of the budget to the strategic plan can help to avoid board members questioning the cost of paper when they need to focus on the big picture.
Questions to Consider
1. Does our organization’s financial management staff have the know-how to carry out its responsibilities?
2. Do our board members really understand the finances of the organization?
Finally, fiscal sponsorship may also be an alternative for smaller organizations that struggle under the burden of 501(c)(3) regulations. Offering fiscal sponsorship opportunities could also be an asset to larger nonprofits that want to provide a specific service without creating an additional division or building a new infrastructure.
The nonprofit sector cannot continue to just “do more with less”; the answer may have to be doing “less with less”. So rather than just continuing to cut expenses, leaders need to identify new ways to manage their nonprofit business that will enable the organization to anticipate financial problems before they arise so it can continue to meet mission.
Contact Jeff Vengrow at (330) 762-9670 to learn how CNE can help your nonprofit address its financial infrastructure and capacity-building needs.
References & Resources:
Click here to download a PDF version of this article.
1. “Make Every Dollar Count: Simple Cash Management For Nonprofit Organizations.” Shorebank, Nonprofit Financial Center, and CPA’s for the Public Interest, May 2005. Shorebank. PDF file. Accessed April 30, 2010. https://www.sbk.com/nonprofit/nonprofit-resources/publications/
2. “Managing in Hard Times.” Institute for Conservation Leadership, Environmental Support Center, 2009. Institute for Conservation Leadership. PDF file. Accessed April 30, 2010. http://www.icl.org/resources/publications/managing-hard-times-pdf
3. Dropkin, Murray, and Bill La Touche. The Budget-Building Book for Nonprofits: A Step-by-Step Guide for Nonprofit Managers and Boards. San Francisco: Jossey-Bass Publishers, 1998.
4/2010