Tag Archive for: budgeting

Comparing Your Nonprofit Budget to Actual

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Do you know the financial health of your nonprofit organization? Knowing where your finances stand is essential to effective nonprofit management. One of the best ways to get a quick read on your organization’s financial health is to compare your nonprofit budget to actual performance.

A budget to actual analysis helps you look at your estimated revenue and expense versus what your organization actually saw. Let’s take a closer look at the importance of budget to actual analysis and go over some tips for performing a budget to actual review.

nonprofit budget

The Importance of Nonprofit Budget to Actual Reporting

Nonprofit budget to actual reporting is the process of comparing your organization’s budget to the actual revenue and expenses over a given time. It’s an essential part of nonprofit financial management for a few reasons.

First, reviewing your nonprofit budget compared to actual performance helps you maintain financial transparency and accountability. By knowing where budgeted funds actually end up, you reduce the chance of fraud or inaccuracies in your financial statements. This helps improve donor confidence in your organization. Accurate data also helps you stay in compliance with legal regulations and tax laws, such as annual IRS filings.

In addition, budget to actual reporting can help improve strategic decision-making and financial performance evaluation. Budget to actual reporting lets you spot trends and identify issues in your finances so you can make data-driven decisions.

What to Look for in a Nonprofit Budget to Actual Analysis

There are a few different metrics to keep on your radar as you complete a budget to actual analysis, including:

  • Variances: Budget variances are the difference between your organization’s budget and its actual finances, generally by category. For example, you budget $2,000 per month for payroll, but your actual costs are $2,500. You have a negative variance of $500 in the payroll category.
  • Revenue sources: Recording revenue is an essential part of running a nonprofit. Your budget to actual analysis helps you identify regular sources of revenue–as well as any areas where you could improve revenue streams.
  • Expenses: Your nonprofit expenses are one of the most straightforward areas of a budget to actual analysis. However, looking at budgeted versus actual expenses can provide helpful insights into where your organization’s money is going.
  • Cash flow: Monitoring your budgeted and actual cash flow can help you spot and fix cash flow issues proactively.
  • Budget assumptions: Budget to actual reporting helps you accurately create budget assumptions using real data from your current–and past–finances. Regularly reviewing budget to actual reports can make it easier to form accurate and effective budget assumptions for the future.
  • Financial ratios: Financial ratios are financial calculations that help you monitor your organization’s financial state. They can help you identify which areas of your organization are most financially successful, or where you may need to trim the budget.
  • Budgeting process: Comparing your budget to actual data is an important step in improving your budgeting process. The closer your budget to actual reports gets, the more effective your budget becomes.

Tips for Making Adjustments if Your Nonprofit Budget to Actual Is Off

Even the most financially savvy nonprofit leaders can have variances in their budget to actual reports. If you find your budget to actual is off, you may need to reevaluate your budgeting process to create more accurate budgets going forward.

A budget to actual report makes it easy to identify where you may need to work on your budgeting. Being proactive and strategic with budget adjustments will help your organization improve the usefulness of a budget.

Follow these five tips to help get your budget to actual back on track:

  • Identify the root cause: This involves looking through your estimated and actual expenses and revenue to find where the variations occurred–and why they happened in the first place.
  • Prioritize areas for correction: Make a list of the areas or categories of your budget to actual report that is the most impactful for your organization and plan to focus on fixing those areas first.
  • Adjust spending priorities: It’s not always possible to completely cut expenses, but you may be able to reallocate funds between expense categories to better align your budget and actual data.
  • Explore ways to generate more revenue: If your actual expenses are higher than your budget allows, it may be time to consider new revenue streams, such as additional fundraising or applying for grant money.
  • Continue monitoring process: Regularly reviewing your budget and comparing it with your actual expense and revenue data is the key to improving your budget and reducing variances. Additionally, regular reviews can help promote accountability and transparency, building trust with your donors and your board of directors.

nonprofit budget

Leverage Your Nonprofit Budget to Actual for Success

Effective budgeting and monitoring of actual financial performance are essential for the long-term sustainability of your nonprofit. Reviewing your budget to actual data gives you a chance to spot trends and identify problems in your organization’s financial health. This information then helps you proactively address issues and make strategic adjustments to improve your financial standing.

If you’re unsure of where to start comparing budget to actual performance, consider working with a trusted nonprofit accounting firm like The Charity CFO. Our dedicated team of nonprofit accountants can help you review your budget to actual reporting. We’ll help you identify trends and create solutions so your nonprofit can run smoother and more effectively.

Contact us today to learn more about budget to actual analysis.

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Budget Tracking for Nonprofits

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Budget tracking is the process of monitoring your nonprofit’s income and expenses to ensure they stay within your planned budget. Effective budget tracking is essential to financial transparency, efficient resource allocation, and strategic planning for your nonprofit.

Tracking your budget helps with overall budget management, which contributes to your financial stability and the success of your nonprofit mission. 

Keep reading to learn more about budget tracking and how it can help your organization improve financial efficiency and effectiveness.

budget tracking

Budgets are Essential for Nonprofit Organizations

While they can be overwhelming to create, having a budget is a necessity for any organization. Think of your nonprofit budget as the financial roadmap for your organization. With a budget in place, you can easily align your finances with the mission of your organization to achieve goals. 

Not only will you need a budget for operations and internal decision making, you will also need a budget for grant applications and when asking for gifts from the general public.

As you get started with the budget making process, here are a few things to keep in mind: 

  1. Include a detailed look at all revenue sources. Start with the certain revenue streams and work your way to the less certain (we’ll cover this in more depth later). 
  2. Include programs, fundraising, and administrative costs
  3. Budget by program (if applicable)
  4. Budget for a surplus to finance expansion in future years 

Without a budget in place, you’re left scrambling to ensure you have the funds to cover expenses, such as paying employees or funding nonprofit programs.

But your budget shouldn’t be a “set it and forget it” plan. You also need to track your expenses and income to make sure you’re sticking to your carefully-planned budget. The role of budget tracking is to ensure resources are allocated correctly, especially to key initiatives that are essential for organizational success.

A budget and tracking system also help with transparency and accountability at all levels of your organization. It’s easy to audit a nonprofit budget to check for potential errors and reduce the possibility of fraud.

Creating a Comprehensive Nonprofit Budget – Start with the Details

There are two common ways to budget; starting high-level and moving granularly or starting granularly and moving high-level. At The Charity CFO, we like to do the latter because we feel it leaves you with a more realistic budget base. From there, we move on to reviewing the prior year’s activity.

Review Prior Year Activity

To review your prior year’s activity, you’ll use a “Profit and Loss Detail” report or something similar. This is found in your accounting system and you’ll want to run a report based on the current year. It’s the best way to review current-year expenditures for what you might be spending next year, in fact, you can consider it as a template for your budget. 

Discuss Upcoming Expenses, Revenues, and Adjustments 

Go line by line with the Profit and Loss Detail. Start with expenses and figure out what investments you need to be making in the coming year to achieve your goals and objectives. Try not to think about where the money is coming from, just think of the ideal scenario about who you want to hire, the investments you want to make, and the cost of the space you’re using. 

Start with the largest expense and map it out in detail. (Example: The largest expense is typically payroll. Consider exactly what you want to pay each employee.) Then move to the next largest. Continue this process until you’ve reviewed every expense. We advise you to be a little generous in these categories. It’s better to expect more expenses than to underestimate.

Move On To Revenues

Start by recording what you expect to fundraise in the coming year. We like to start with any revenue that is most certain and then work our way to the least certain. For example, if you receive an annual grant from the government, that’s a fairly “certain” revenue. Budget these first. 

Then move on to your less certain revenue streams, like fundraising event income, because these are tougher to estimate. Our tip: budget conservatively for these.

Budget for a Surplus 

Once you’ve gone through all of your revenue and expenses, you’ll need to see if you are in a surplus or a deficit for the coming year. Your goal is to be in a surplus so that you can financially expand in the future. 

Keep in mind that you won’t be able to budget in a massive surplus; your funders won’t let you get away with that. However, a modest surplus will allow you to build up your reserves so that you can fund your next growth plan. This will look different for every organization. 

For a more detailed explanation of creating a budget, check out this video. 

budget tracking

Leverage Budget Tracking for a More Successful Nonprofit

Your nonprofit’s budget only works if you know you’re sticking to it. Implementing a budget tracking system helps you monitor your budget so you can stay on target to meet financial goals.

Make creating an effective budget tracking strategy a priority as you set your upcoming budgets. Taking the time to set up your tracking correctly will aid in the long-term financial success of your organization.

Not sure where to start with creating your budget tracking system? Working with a nonprofit accountant like The Charity CFO takes the challenge off of your plate. As financial professionals specializing in nonprofit financial success, our team can help you create and implement an effective budget tracking strategy no matter the size or revenue of your organization.

Contact us today to get started building your budget tracking system.

 

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A Beginner’s Guide to Nonprofit Budgeting

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Nonprofits are not run to make money. But they do make serious progress.

More than 1.5 million nonprofits are registered with the IRS. They contribute more than one trillion dollars to the economy. One-quarter of American adults volunteer with a nonprofit, helping their community on a number of issues.

You will make a difference as soon as you start a nonprofit. But you can make a real difference if you understand nonprofit budgeting.

However much money you have, you need to know how to allocate it into worthwhile projects. There are a few things you should understand in order to do that. Here is your quick guide.

Distinguish Nonprofit Budgeting From for-Profit Budgeting

You may have experience in budgeting and accounting for for-profit organizations. That will help you when budgeting for a non-profit. But you should know that there are substantial distinctions.

For-profit businesses are accountable to their investors. They have a lot more autonomy accordingly. As long as they are within the bounds of the law, they can take any measures they need to make money.

A nonprofit organization is accountable to anyone who donates to it. They must report how they use their funds, then they must hold to their word.

For-profit organizations distribute their profits to their investors. Nonprofit organizations must reinvest their profits into themselves. They can pay for full-time employees, but all profits must be built for the greater good in some way.

Nonprofits are exempt from paying taxes on their funds. This makes tax forms far easier. But they are liable to payroll taxes, just as for-profit groups are.

Break Down Your Budget Components

Your budget as a whole should allocate resources for all operations. You will make clear how these resources are allocated in several ways.

The nonprofit budget is actually two separate documents. The operating budget shows what the projected revenue of the year will be. It also logs the expenses of the entire organization.

All nonprofit funding streams should be defined. When possible, the budget should list the names of donors. This helps with donor management and transparency.

You should also distinguish your different expenses. You incur both program and overhead costs. List out every cost there is, even small ones.

While the operating budget looks at one year’s financial picture, the capital budget looks long-term. It projects what the future expenses and revenue will be, given the track record of ongoing and multi-year projects. This helps executives strategize.

Every budget component should correspond to a specific activity. If there is an unnecessary cost, it should be cut out. If there are leftover expenses, those should be used in some way.

Conceive the Budget Itself

The process of making the budget should begin early on. The board of directors should discuss, debate, and approve the budget before the start of the fiscal year.

Start by negotiating a timeline with the board. Make sure you have time to write it out, but you should leave enough time for them to discuss it.

Agree on what the budget template should look like. Have the board give you the budgeting resources that you need. This includes money set aside for professionals to look over your work.

Review all relevant financial documents, including last year’s operating budget. If there is any variance between actual revenues and projected ones, understand why that is the case.

Take time to do your research. Talk to the nonprofit’s accountants and external financial advisors.

Develop several drafts of your operating and capital budget documents. Ask other budgeting experts to oversee your work. Take their suggestions and make edits accordingly.

When you have a good final draft, deliver it to the board of directors. If you can sit in on their meetings, do so. Answer their questions and ask new ones about what the future of the company will look like.

Run Budget Reviews

Budget reviews are essential components of a nonprofit’s financial life. Because nonprofits must put all revenues back into the organization, budget reviews are check-ins to ensure that this is being done.

You should conduct a personal review every week. You should check to make sure all financial goals are being met, especially with funding. If your nonprofit is using too much money, it will run into trouble.

You should then conduct a teamwide review every month. All of you should look over the finances for the month.

You should examine the balance between budgeted and real-world expenses. Your team should take note of all discrepancies so future budget components fall in line.

You should also conduct quarterly reviews. This is when you review the entirety of the budget. You can track previous discrepancies and see if they line up with actual revenue streams.

An annual review loops other relevant parties into your nonprofit’s financial picture. You should tell the CEO how the budget stayed on course over the last year.

The two of you can talk about program outcomes. If something did not work, you can cut it or adjust its funding. Use their oversight to adjust the budget for next year.

Know About Nonprofits

Nonprofit budgeting is important to your nonprofit’s financial footprint. Whatever experience you have with for-profit budgeting, put that aside. You need to report how all of your funds are used to support your cause.

When making a budget, be as specific as possible. Distinguish between real and projected expenses and revenues.

Take time drafting out your budget. Set clear terms and expectations with the board of directors. Then run several budget reviews, including an annual one with the CEO.

Get the support you need to make a difference. The Charity CFO offers premium budgeting resources for nonprofits. Contact us today.