Ten Tips for Drafting Your Annual Budget

Your annual operating budget is a key management and planning document approved by your board as a current-year operating policy. By defining and quantifying your financial targets, it provides a financial road map that can help you successfully navigate your cycle of programs, services, events and other activities. Creating a detailed plan, grounded in reality, is an essential first step to effective financial management.

1. Format can support you. Treat your budget as part of a broader financial management effort, which embraces your accounting system, external reports (e.g. grants, taxation) and management reporting needs. Your budget categories should align with your accounts, and with the funding and tax forms that you need to complete. This integrates planning with records-keeping, and helps the bookkeeper, managers and board to speak the same financial language. Create a spreadsheet template and use it year over year. Base your financial report spreadsheets on the same template. Consistent formatting makes it easier to share documents and coordinate amongst staff, volunteers and board.
2. A conservative approach: start from revenues. Here’s a good piece of advice – don’t spend money that you don’t have! If you start your budget process by thinking carefully about how much revenue you are likely to generate, you are less likely to “bluesky” your way through the expense lines and wind up with a deficit on the bottom line. This method is particularly effective for organizations with only a few years of history under their belts. Your past revenue achievements are likely to point to what you can reliably predict for this year, giving you reasonable boundaries for planning your expenditures.
3. Testing a new idea: start from expenses. What if you’re launching a big new project? In this case, it’s important to consider what investment it would take to make your new activity a success. You may need to work your way through the expense lines first, and then think about how you will cover your costs.
4. Start from knowns and work towards estimates. On both the revenue and expense sides of your budget, you will know more about some lines than others. For instance, you might have confirmed multi-year funding that you can slot into revenue lines, and leases, union agreements and employment contracts that you can plug into expense lines. At the other end of the scale, the forecasts for some lines may amount to educated guesses, based on past history and current circumstances. If you fill in the knowns first, you create a context that can support the process of estimating other figures.
5. Start from last year’s actual results. Past accounting data can have strong predictive value. If this year’s operations are going to be similar to last year’s, and your charity’s circumstances haven’t changed significantly, then it can be effective to base your budget on previous actuals and adjust as needed for your evolving situation.
6. Use reasonability calculations where appropriate. This technique breaks your budget estimate down into its components, and helps you think things through at a higher level of detail. For example, I could ballpark my advertising expense, or I could break it down to X ads times Y price. Similarly, I could break down my part-time staff expense to X individuals, times Y hours per week, times Z rate of pay. Not all budget items lend themselves to this treatment: categories that are catch-alls for numerous items, such as office supplies, may call for a ballpark figure.
7. Research. Base your budget estimates on research where you can. “Hard” research may take you to catalogues, websites and quotes from suppliers. “Soft” research, such as advice from colleagues, can help you to develop sound options and to learn from others’ experience.
8. Use building blocks. You can build your operating budget from smaller components by developing separate budgets for each program or activity. These add up to your plan for the year. To them, you will need to add an overhead budget, including administration and any other items that can’t readily be broken by activity (e.g. insurance, fire and security). This technique lends itself to a decentralized approach, where every program manager develops their own budget, and the executive director assembles the building blocks, and negotiates any changes required to make the operating budget work.
9. Make an environmental scan. Charities can be highly vulnerable to changes in their environment. Donation and grant revenue is sensitive to economic circumstances, personal taxation and local labour market conditions. Political change can bring some issues to the foreground and back-burner others, and affect the availability of government support. Tax and regulatory changes can affect your expense picture. Stay in touch with the news, and consider how the changing environment may impact your budget forecasts. Remember, your bookkeeper should be a source of up to date details.
10. Don’t idealize. And don’t catastrophize either. It can happen that everything goes your way – or goes against you – but more often things are somewhere in the middle. In particular, don’t get hooked on a wonderful idea and assume that everything will fall in line to support your vision. Develop best-case and worst-case scenarios, then settle on an estimate somewhere in between, based on your assessment of what the contingencies might be.

This tip sheet was created by Heather Young of Young Associates. Founded in 1993, Young Associates provides bookkeeping and financial management services in the charitable sector, focused on arts and culture. Young Associates also provides consulting services in the areas of data management, business planning and strategic planning. Heather Young published Finance for the Arts in Canada (2005), a textbook and self-study guide on accounting and financial management for not-for-profit arts organizations.

Disclaimer

Ministry of Finance’s Procurement Guidelines for Non-designated, Public Funded Organizations in Ontario

Staff Post
By Heather Young 

The Ontario Ministry of Finance is planning to introduce these guidelines for organizations receiving funding from the Government of Ontario.

They propose standards for making purchases (e.g. seeking comparative quotes) — and will set expectations for how publicly funded organizations should behave in making their expense decisions. At the moment, they are guidelines — not requirements.

This is happening in the wake of the 2010 Broader Public Sector Accountability Act, which issues procurement *directives* to an array of organizations including hospitals, school boards, colleges, universities, Community Care Access Centres, Children’s Aid Societies and organizations that receive more than $10 million in funding from the Ontario government.

The Ministry is seeking feedback on its proposed guidelines.

The Ontario Nonprofit Network (ONN) is one sectoral association that’s addressing this topic on behalf of all of us. They are circulating copies of the draft guidelines and will assemble the comments they receive into a report for the Ministry.

If you’re interested in learning more, please contact Sue Wilkinson, ONN’s Director at 416-642-5786. She needs your comments by DECEMBER 14, 2011, in order to include them in her report.

Ten Tips for Analysing Your Organization’s Balance Sheet

Understanding your organization’s financial statements is essential to controlling the purse strings. These ten tips are intended to help you better assess and interpret your Balance Sheet – a.k.a. Statement of Financial Position, or Statement of Fund Balances.

The balance sheet captures the value of your assets (things you own), liabilities (what you owe) and net assets (difference between assets and liabilities). This statement shows your organization’s financial position at a single moment in time. (The next moment, things may change – every deposit and withdrawal changes the balance sheet.) The balance sheet is often more challenging to interpret than its companion, the statement of operations. However, grasping it is essential to understanding your charity’s finances.

1. Understand your financial documents. Formal financial statements (including those prepared by professional accountants and those generated by commercial software programs) are designed to be understandable by people who’ve made a reasonable effort to learn how to read them. It’s worth taking the time to become familiar with the layout and terminology. Read your balance sheet regularly. The more familiar you are with your organization’s reports, the better you’ll become at spotting good news and bad news, and knowing how to address potential problems.
2. Balance sheet accounts are “permanent.” These account balances roll on from year to year. Last year’s closing balances become this year’s opening balances. In contrast, revenue and expense accounts (found on your operating statement) start at zero each fiscal year, accumulate a full year of results, and are “re-set” to zero for the new year. That is, your operating statement shows only current year activity. When you read the balance sheet, you need to be able to interpret what’s current and what’s historical. Transactions stay on the balance sheet until they are settled. Thus, last year’s unpaid bills will sit in Accounts Payable until you use this year’s income to pay them off.
3. Understand how day to day operations affect the balance sheet. The Balance Sheet shows your organization’s “lifetime” result – the accumulated surplus or deficit – in the Net Assets section. This year’s revenues contribute to an accumulated surplus or deficit, and this year’s expenses reduce it. If this year is going well from a financial viewpoint, then quite likely your operating results are increasing your assets, decreasing your liabilities, and increasing your net assets. The opposite is also true. You need both statements to understand your situation fully. (NB: see also “Ten Tips for Analysing Your Organization’s Operating Statement.”)
4. Go beyond the cash account. Yes, most of your transactions probably go through the bank as cheques and deposits. It’s tempting to read the operating statement and the bank balance, and feel that you’ve gone as far as you need to go. However, you need to look at all balance sheet accounts to understand your resources and obligations. Some accounts contain transactions in progress, e.g. Accounts Receivable (we’ve sold goods or services but the client has not yet paid) and Accounts Payable (we’ve purchased goods or services but we have not yet paid). Receivables appear in your revenue accounts – but you haven’t yet got your money. Payables appear in your expense accounts – but you haven’t yet paid for them. These items haven’t hit the bank yet – but they will – and you need to know what to expect. These are just a couple of typical examples. Make sure you understand all of your charity’s particular balance sheet categories.
5. “Current” has an accounting meaning. Anything “current” pertains to items that are cash or will be converted to cash within this fiscal year. (See the next two bullet points for fuller explanations.) Anything not designated “current” has a longer timeline. Thus, long-term liabilities don’t need to be settled this fiscal year (e.g. if you have a mortgage, this year’s payments are a current liability, and the rest is a long-term liability). Capital assets are items of substantial value that are owned for longer than a year.
6. Current assets = short-term resources. The #1 current asset is cash – in the bank, in short-term investments, in your petty cash box. Other current assets are considered “near-cash” in that they will be realized for cash within the year. You need to know what you’ve got here. If people owe you money (Accounts Receivable) – who, how much, and how quickly can you collect? If you’ve paid for something in advance of receiving it (Prepaid Expense – e.g. a rent deposit for a special event), when will you get the value of it? These are typical current assets. Your charity may have other categories – all of which represent financial resources to you.
7. Current liabilities = short-term obligations. These are debts that must be paid within the year. If you owe money to others (Accounts Payable) – to whom, how much, when are the obligations due, and how will you meet them? If you have received money in advance (Deferred Revenue – e.g. a grant or sponsorship for next year, received early), will you have enough cash to carry out the obligation when it falls due? These are typical current liabilities. Your charity may have other categories – all of which represent obligations that must be met.
8. Working capital = current assets minus current liabilities. This figure defines your ability to carry on in the short term. If current assets exceed current liabilities, you’re doing well! You have more than you need to meet short-term obligations – as long as your near-cash items become cash before your debts are due. If your current liabilities are greater, you may be facing financial challenges. Calculating working capital and understanding the details behind your balance sheet figures are key to assessing what kind of shape you’re in.
9. Capital assets and depreciation (amortization) policy affect your financial position. A capital asset is an item of value that your charity will own for more than a year. Typical examples include buildings, land and equipment. Depreciation (amortization) is an accounting mechanism that allows you to spread the cost of an asset over the estimated years of ownership. (It’s tempting to think that depreciation equals the decline in an asset’s value over time. This might be true – but often it isn’t. For example, many companies depreciate computers over a three-year period. Do you think your $1000 computer would fetch $666 if you tried to sell it after owning it for a year?) Depreciation is an estimate, pure and simple. Choosing a longer depreciation period versus a shorter one affects your financial position – and your operating statement. For instance, if I depreciate my $1000 computer over three years, each year bears $333 of expense. If I depreciated it over two years, each year would bear $500 of expense. If I used a four-year depreciation period, each year would bear $250 of expense. How many years will I get out of the computer? Impossible to know ahead of time. This is a fairly complicated topic – beyond the scope of this tip sheet – and a good one to explore with your chartered accountant.
10. Compare deferred revenue to current assets. It’s fairly common for charities to have deferred revenue: e.g. grants and sponsorships intended for next year but received early; the unspent portion of a multi-year grant; subscription sales for next season. If you’re in good financial shape, your deferred revenue will be sitting in the bank, or in short-term investments. If your cash balances are less than your deferred revenue, it means that you’ve already spent that money on immediate needs. Comparing deferred revenue to your cash accounts will tell you quickly about your ability to meet this category of obligation.

This tip sheet was created by Heather Young of Young Associates. Founded in 1993, Young Associates provides bookkeeping and financial management services in the charitable sector, focused on arts and culture. Young Associates also provides consulting services in the areas of data management, business planning and strategic planning. Heather Young published Finance for the Arts in Canada (2005), a textbook and self-study guide on accounting and financial management for not-for-profit arts organizations.

Disclaimer

Rebuttal to Toronto Star article “Audit of charities encounters resistance”

Staff Post
By Katie Chasowy 

In a week of stories involving several Greater Toronto Area charities being stripped of their charitable status, the Toronto Star also published a story by Raveena Aulakh and Amy  Dempsey on Tuesday, November 15, 2011 with the headline “Audit of charities encounters resistance”. The article begins by accusing several large Canadian charities of not being transparent because they do not post their audited financial statements on their website and refused to give their statements to an “independent agency that evaluates charities”. This independent agency, Charity Intelligence, also coincidentally was launching their new website on the same day that this article was published. The article also criticized charities for spending too much on fundraising and having too much cash in the bank, then published the names of several organizations deemed to be serious offenders.

I had a very strong reaction upon first reading this article and spent the next few days thinking about how to respond. I was happy to see that Mark Blumberg of the Canadian Charity Law website had posted a reaction to the Toronto Star article. Blumberg agrees that charities must be transparent, but shares many of my concerns with this article. His post is definitely worth a read and includes many helpful links about transparency in charities around the world, non-compliance with the CRA, and CRA fundraising ratios.

Here are the main points that I took issue with in the Toronto Star article (emphasis mine):

Nineteen of Canada’s 100 largest charities do not release their full audited financial statements to the public and refused to provide them to an independent agency that evaluates charities.

Later in the article Greg Thomson, the director of Charity Intelligence, ponders why certain organizations didn’t respond to their request for financial statements.

“There could be a number of reasons,” Thomson told the Star in an interview. “In some cases, it’s not high priority for them . . . others probably wondered who we are. Some might worry that someone will find something.”

Charities are not legally bound to disclose their audited financial statements to the public, but it is considered ethical to do sobecause they take in public dollars, Thomson said.

“If a charity is not transparent, you may as well reconsider donating.”

Charities do disclose their financial data publicly in their annual T3010 filing with the Canada Revenue Organization. Every organization in this country that is a charity has their recent and past (up to 10 years in some cases) financial information available online from the CRA’s website. As Mark Blumberg points out, many organizations release their financial statements, either summarized or in full, on their own website.

Accusing charities of not being transparent because they didn’t respond to a website’s request for statements and then later implying that you should reconsider donating is quite problematic. Of course you should do research into an organization before donating, but just because you can’t find their statements on the charity’s website does not mean there is a serious enough transparency issue that you should not donate. If you have questions into an organization’s finances, ask the organization directly. If the organization is large enough to have a development department, start there. If not, ask the administrative staff or managing/executive director.

One-quarter of the top 100 charities* have enough cash on hand to run their current programs for three or more years without having to fundraise another penny.

[Charity Intelligence] does not advise against donating to charities with large reserve funds but it does tell donors who don’t want their money to sit in a bank account for several years to go with a charity that has a more immediate need.

“Every charity has a cash cushion,” Trypuc** said. “What we’re questioning is how much of a cash cushion they need.”

* “Top 100 charities” as deemed by Charity Intelligence criteria. Mark Blumberg points out, These are not the largest charities in Canada in terms of revenue or assets.  These are the 100 charities that have been identified by Charity Intelligence (“CI”) as “Canada’s Major 100 Charities” and as having received the largest fundraising revenue.
** Bri Trypuc is in charge of Donor Services for Charity Intelligence. Yes, Charity Intelligence is also a charity. You can donate to themhere.

Yes, every organization does need a cash cushion. These cushions allow an organization to be sustainable and carry forward with their programming even in hard times. Having a large reserve, however, does not necessarily mean that donation dollars are being squirreled away in the bank. Reserve funds are partly for overall sustainability, but also for larger projects whether they be capital or programming.  Reserve funds could also be endowment funds that are actually earned revenue streams via interest. If you’re concerned about where your donation is going, the best way to find out is to ask the organization how your donation will be spent.

Websites such as Charity Intelligence, when used critically, can be very useful tools for deciding where to donate your money, but should not be used on their own. Research into a charity should include sites like this, but should not replace building your own relationship with a charity by asking them questions directly.

Finally, I think one of the most concerning aspects of this article is that it was published on the same day as the Charity Intelligence website launch, however, the article uses no other resources to support its claims. While transparency and direction of donor dollars are important issues, essentially accusing several large organizations of not being transparent and wasting donation dollars to promote a website and organization that is itself a charity raises some interesting questions about transparency and ethics as well.

Reaction to Charity Intelligence:

Toronto Star article “Audit of charities encounters resistance” by Mark Blumberg on Canadian Charity Law.

Charity Intelligence: Transparent on Transparency? by Andy Levy-Ajzkenkopf on Charity Village.

Have a comment on this staff post? Contribute to the conversation on our discussion board.

UPDATE:

September 21, 2012: According September 15th’s Canada Gazette (p2662), Charity Intelligence has been sent a notice to revoke their Charitable Status because they haven’t met the filing requirements of the Income Tax Act. (Heard through Charity Village).