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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.