Determining the budget is one of the very first steps in taking on a new project, regardless of size or scope. Creating a budget at the beginning of your project allows you to measure the spending levels against the budget at any point in time during the implementation of the project.
A budget should also help you to define priorities. A common practice among nonprofits is measuring the spending on a project against the number of individuals that project has served at the end of the year. This calculation provides an approximation of the cost in providing your service.
Budgeting for your organization is an ongoing process and it should not stop at the approval of the operational budget. You should continue to monitor its effectiveness and gather information on expense alternatives to maximize value.
This should be your main budget. You may be running more than one program. If this is the case, you should integrate all your programs within this operational budget. Eventually, as your project grows, begin to budget for every single program, keeping in mind that you should integrate them all into your final operational budget.
Regardless of the size of your project, you must include a clear and concise justification for allocation of your overhead costs (fundraising and administration) within your budget. Keeping your project’s overhead cost low signals competent financial management.
If this is the very first budget you are creating, it is highly recommended to not change any final numbers in the budget. Careful monitoring of the final budget will allow the project to stay on budget, and make better allocations whenever it is time to draft the following year’s budget.
Roles and responsibilities in budgeting
As a general rule, the roles and responsibilities for budgeting should be spelled out in written policies before you prepare the first budget draft. This policy should be revised and updated, if needed, as you gain experience in the budgeting process. A budget is a plan and therefore you need guidelines to implement this plan. The budget policy should focus on at least on the following guidelines:
- Which staff are responsible for the drafting of the budget.
- Deadlines for drafting, revising, and approving the budget.
- Staff responsible for supervising the budget
- Person(s) responsible for revising the budget for modifications before submitting it for approval
- Person(s) legally responsible for approving the budget to make sure that it meets legal regulations, the priorities of the project, the productive use of resources, and effectiveness in accomplishing the mission of the project.
You may wish to decide that the Director of your organization is solely responsible for revising the budget, making modifications, communicating the budget to the rest of the leadership team, and presenting the final draft to the board, if your project has been incorporated.
In many cases the Board of Directors is responsible for approving and making sure that the final budget is fiscally sound and will further the purpose of the project.
The lead finance staff member is generally solely responsible for creating and monitoring the budget, and for searching for new opportunities in reducing costs. Typically all financial managers use the budget vs. actual as a tool for monitoring operational budgets. This tool will show you the material variances for each expens
Program managers are better suited to provide information about salaries and operational costs since they deal with the resources to run a program on a daily basis. They also have current information on program needs, and should be consulted throughout – particularly in the event that you need to draw up a corrective action plan for the effectiveness of your overall project. Including program managers in budgeting also enables you to make them accountable for the accuracy of budgets that are integrated into your operational budget.
Fundraising staff should be responsible for providing information about the amount of revenue needed to run a project. Revise your priorities before communicating with your fundraising team to see if you need to increase your target revenue to cover your operational expenses.
The more information you have about revenues and expenses to run your project the better, as this allows you to make your budgeting simpler and more accurate. With a reliable estimate of your expenses, you are better able to predict the amount of income required to run the project. If this is the first year of operations, the total of your income and the total of your expenses should generally match. As a general rule, your operational budget should nearly resemble your end-of-year Statement of Activities report, also known as a Profit and Loss report. Try not to estimate a deficit, if this is your first budget: this suggests that your priorities are not well balanced. Ending a year with a surplus enables you to maintain some funds set aside as operational reserves, to cover those years in which you are not able to meet your target revenues.
If your project doesn’t have a set fundraising plan to cover your operational expenses, think about other sources of income. Perhaps you could charge for the service your project would be providing.
Drafting the budget
It is highly recommended to have a set revenue plan before starting to draft your first budget. This plan should include committed and projected revenues. Ideally, you should have enough committed revenue to break even at the end of the year, and count the difference between your committed revenue and your projected revenue as your surplus. This will help you to not fail financially the very first year of your project. The following is a guide to identify and differentiate your sources of revenue.
Any donation without a restriction or purpose to be used to pay for operational expenses.
Donations with a restriction or purpose to be disbursed upon donor’s restrictions. Restricted income is accounted differently from unrestricted income.
Known as exchange funds or conditioned funds. Typically you provide the service, and then you get paid for it. The type and duration of service is written on the grant award letter.
Funds restricted to be spent within a period of time. These funds are commonly known as multi-year grants.
Once you have set your priorities, you should be able to draft the portion of your operational expenses. If you are starting with one office, this does not have to be complicated, but if you running more than one office, divide your operational expenses by office. As mentioned before, programs or divisions can be integrated into this operational budget.
Use benchmarking to collect information about salaries. Once you have set your salary ranges for the first year, you need to have a salaries policy for the following year’s budget. This can help guide you when making salary increases and hiring additional staff. It is a characteristic of non-profits to spend most of their income on salaries. Keep in mind that rather than paying salaries you could also recruit volunteers.
Begin with your fixed costs. These are expenses that you would be paying regardless of the amount of services you end up providing. Rent, furniture, communication equipment, utilities, memberships, and insurance are examples of fixed costs. As a general rule for a start-up organization, you should keep your fixed costs low. Some variable costs (travel and transportation, office supplies, maintenance) that would increase with the amount of work in your project, can be strategically negotiated. For example, rather than using office supplies, you could create, archive and maintain your documents online, or you could start using a single vendor from the very beginning of your project to maximize your loyalty in order to obtain discounts or credits. Use a cost/benefit analysis to project your fixed costs and variable costs wisely.
Accounting for your budget
As a final note, separate each expense line item in your budget with names identical to the line items in your chart of accounts. This will allow you to make one to one comparisons and provide clear and accurate financial reporting. The Unified Chart of Account (UCOA) is the best guidance to design your chart of accounts.