Organizations need to have a budget. This is the case whether they are a non-profit, a charity or simply a group of people who have come together for a purpose. A budget is a detailed plan about how you are going to use your resources.
Expected Income & Expenses
Most often organizations, just like people, do not have enough money and energy to do everything they would like to. A budget is a deliberate decision in advance about what will have priority among the many things your organization may want to do. One of the greatest advantages of preparing a budget is that it requires organizations to "put their money where their mouth is."
Your organization may plan on doing many things but those plans that you are committed to seeing through will be reflected in the budget. It is a working document which reflects the joint planning effort of many people and is meant to form the basis for action. It is an important tool used to ensure that your financial management responsibilities are being met.
The budget is an estimate of income and expenses for the period of 12 months chosen as your business year. A business year is also known as a fiscal year. For example, an organization that runs a school may want to have their fiscal year run from July 1st to June 30th so that each budget covers a school year.
Expected Income
You start the budget process by looking at your organization's expected income for the fiscal year. Typically, the budget process is started several months before the organization's year-end. This allows any approvals to be made beforehand. For example, approval from the Board of Directors may be needed before a budget can be approved.
It can be difficult to estimate an amount of expected income for the next fiscal year. This is especially the case in the first year of operation. Estimates have to be made based on the best information available to the organization at the time. Some research into possible sources of funding and the amounts that can be expected from them can be helpful. Similar organizations may be willing to share information on how much they made doing things like fundraising.
Sources of Income
The main source of income for many non-profit organizations are:
- contributions from the general public
- grants from the government
- fundraising
All sources of revenue are stated as the actual amount your organization will receive before expenses are deducted. For example, if you are planning a fundraising social, you may expect to bring in $4,000 from ticket sales. To put on the event, you expect that it will cost you $1,500 for the dinner. In this case, you expect that your profit will be $2,500. However, you do not simply record the expected profit as income in your budget. You record the whole amount of money that will come in as income. The costs of raising that money are stated in the budget under expenses.
Sometimes, an organization may be supported through non-cash gifts, known as gifts-in-kind. For example, if your organization was set up to provide meals for people in need, someone might donate food or cooking utensils. For a gift-in-kind, it is included as revenue based on an estimate of its fair market value at the time of the donation. A contribution of service, being someone’s time, skill or effort, is not property. It therefore does not qualify as a non-cash gift and is not part of the budget.
It is generally better to be conservative in estimating revenue. Organizations want to avoid learning during the year that the expected revenues are not near the budgeted amount. This could mean that drastic action with respect to the organization's commitments needs to be taken.
Expected Expenses
Expenses are costs to the organization. Costs are based on what your organization plans to do in the next year. Once you know what you want to do, you can estimate the cost of each activity.
For example, an organization that is going to provide meals for people who need them would have program expenses. This could include things like:
- the cost of food and other supplies for making meals
- the cost of hiring people to run the program by doing things like shopping, cooking, and serving the food and scheduling volunteers
- the cost of hiring people to do administrative work like preparing financial reports for board meetings and buying office supplies, unless it is done by volunteers
- occupancy costs like rent, utilities and office expenses
- if the organization received a non-cash gift, such as food, and recorded the fair market value as income, they would record the same amount as a program expense since the food would be used for their program
In the same way that it is important not to overestimate your income, it is important not to underestimate your costs. If costs are much higher than budgeted, your organization will either have to raise more money or cut back on planned programs during the year. It is usually easier to decrease expenditures than to raise additional funds. However, cutting programs can be disappointing for stakeholders as they may have had higher expectations.
Balancing the Buget
Once the budget is complete, you compare the total expected revenue to the total expenses for the year. Adjustments may have to be made to ensure that you are not planning on spending more money than you are planning on bringing in. On the other hand, if you see that you will have more income than expected expenses, you may want to plan on providing more programs or services. Some leeway should be built into the budget in order to meet unexpected events. Once the budget is completed, it needs to be examined on a regular basis to assess how the plans and estimates play out. Below is an example of a budget.
Cash Budget
A cash budget is prepared after the budget is finalized. It summarizes, on a monthly or quarterly basis, the estimated:
- cash inflows or income
- cash outflows or expenses
The cash budget predicts when and by how much the organization's cash resources will be under or over the requirements to cover the cash demands of the organization. The cash budget is important in terms of planning for any loans, repayment of debt and investing excess cash.
