BASICS OF BUDGETING AND EXPENSE MANAGEMENTFebruary 2, 2010

QUESTIONS TO THINK ABOUT

What is a budget?What is the budgeting process?What are the components of a

budget?What types of budgeting will a

nonprofit use?

QUESTIONS AND REVIEW OF LAST WEEKChart – Nonprofit Giving

REVIEW

OVERVIEW OF FINANCIAL MANAGEMENT

Plan Implement Control Measure Results Report

PLANNING

Mission, vision & values Goals and objectives (organizational and

program) Funding goals & objectives Prospective funding sources Action plan

RESPONSIBILITY CENTERSDESIGNATED AT THE PROGRAM LEVEL

Expense Centers: programs are responsible for managing expenses within confines of program. Designates program managers as day-to-day budget managers.

Revenue Centers: generate revenue to cover expenses. May be responsible for some expenses outside program.

Profit Centers: financially accountable for generating revenues in excess of expenses.

Investment Centers: manage endowments, investments and other assets.

*can be combinations

BUDGETINGFinancial Management Basics & Budget Components

COMPONENTS OF A BUDGET

Revenues Donations – restricted and unrestricted Special Events Grants and Contracts Membership Dues Third-party payments Program income Investment income Miscellaneous – unrelated business income

COMPONENTS OF A BUDGET Expenditures

Salaries and wages Employee related expenses (ERE) Contractors Rent Utilities Supplies Technology (phone, internet, cable) Equipment Postage and shipping Printing and publications Travel Conference Miscellaneous

COST CONSIDERATIONS

Fixed Costs Variable Costs

STEPS TO BUDGET DEVELOPMENT

Prioritize and determine the need at program or activity level

List all possible revenues and expendituresVariableFixed

Separate actual from projected Compare income to expenses and make

adjustments where necessary Budget approval process and adjustments

IMPLEMENTATION - TYPES OF BUDGETS

Line-Item Budgeting Performance Budgeting Program Budgeting

LINE ITEM BUDGETING

Most common Can be prepared on organizational and

program level Purpose is financial control Approved prior to the beginning of the fiscal

year Ideally balanced, often not balanced

LINE ITEM EXAMPLE – OVERVIEW

2011 Mentoring Program Budget

Revenues

Donations 55,000

Special Events 30,000

Grants 140,000

TOTAL REVENUES $225,000

Expenses

Salaries 160,000

Office 28,000

Other 37,000

TOTAL EXPENSES $225,000

LINE ITEM EXAMPLE – REVENUE DETAIL

2011 Mentoring Program Budget

Revenues

Donations 55,000

Special Events

Bowl-a-Thon 10,000

CEO Breakfast 20,000

Grants

US DOE 100,000

Mentoring Foundation 40,000

TOTAL REVENUES $225,000

LINE ITEM EXAMPLE – EXPENSE DETAIL

Expenses

Salaries & Payroll 160,000

Rent 24,000

Technology 2,800

Supplies 1,200

Travel and Conferences 10,000

Marketing 19,000

Misc. (Event Expenses) 8,000

TOTAL EXPENSES $225,000

LINE-ITEM BUDGETS

Simplicity Easy to see and

understand the source and amount of revenues, how the funds will be used, balance

No information about the amount or cost of services

Is not tied to outcomes

Allocation decisions are tied only to line-items

Advantages Disadvantages

PERFORMANCE BUDGETING

Must be done at program level Purpose is to relate expenses to programs by

determining Program output performance measure Total program cost Cost per unit of service o Provides data on productivity

PERFORMANCE BUDGETING

Cost per Output

Total Program Cost / Outputs = Cost per Unit

Mentoring Program/# Mentored

$225,000 ÷ 250 mentored = $900 per mentee

Other measures: hours of service, meals, clients, etc.

PERFORMANCE BUDGETING

Provide information on the amount of service and attendant costs including costs per unit/output

Raise the level of debate beyond line items to programs, services, costs and efficiencies

Organization must employ sophisticated cost analysis techniques that are often beyond the capacity of leadership

Advantages Disadvantages

PROGRAM BUDGETING

Similar the performance budget in that it takes place at the program level

Format is similar to performance budget Focus is on outcome performance, not

outputs or units of service

PROGRAM BUDGETING

Provide information on the amount of client outcomes achieved by program with attendant costs

Raise the level of debate from service and efficiency concerns to client and effectiveness concerns

Good outcome performance measures are hard to develop

Many do not have generally accepted outcome measures

Advantages Disadvantages

PROGRAM BUDGETING

Cost per Outcome

Total Program Cost / Outcome= Cost per Unit

Mentoring Program/# Graduate from HS

$225,000 ÷ 88 graduates = $2557

APPROACHES TO BUDGETING

Centralized (Top-Down) ModelDecentralized (Bottom-Up) Model

GAAP

WHEN BUDGETS DON’T BALANCE…

What do we do???

Revenues

Expenses

CASH AND ACCRUAL ACCOUNTING

Cash: recognizes revenue when it is received in cash and expenses when paid in cash

Accrual: recognizes revenue when it is promised/pledged and expenses when resources are used.

WHICH IS BETTER?

CASH Plans for inflows and

outflows of funding Considers cash on

hand Often used in

smaller organizations and can be manipulated

ACCRUAL Matches revenue

with resources Can be a more

reliable form of determining profitability (more difficult to manipulate)

CAPITAL BUDGETS

For acquisition of high-value assets

Entire value of asset is not shown in a single year’s budget, but is capitalized over the life of the asset

Accrual expenses reflect the actual use of resources

BUDGETING FORMATS

Functional: focus on major areas of function. Easily understood by laypeople.

Flexible: considers expected revenues and expenses and can help work through scenarios. Key – fixed and variable costs.

Responsibility Center: aka program/division budgets

OTHER CONSIDERATIONS

Cost Benefit Analyses Forecasting methods: historical, modeling Forecasting factors: economy, political

climate, trends

REVIEWWhat is a budget?Why would an organization chose a decentralized process?What are the components of a budget?Why is forecasting important?