Exempt Org Budgeting 101


Creating and maintaining a fiscally responsible budget is something that many exempt organizations struggle with on an annual basis. Monitoring financial stability and tracking financial goals is a significant component in any business, but it is possibly more important for an exempt organization due to the responsibility owed to the public. As most calendar year-end exempt organizations are gearing up to prepare their next annual budget and fiscal year-end organizations begin reviewing their current mid-year fiscal budget, it only seemed practical to share some important features of a well-designed budget and some tips on how to get there.

When creating a new budget for the coming fiscal year keep the following things in mind:

#1 The budget should be a roadmap to your current year’s goals

The focus of the budgeting process should be on maximizing program effectiveness and efficiency, while maintaining the appropriate level of supporting administrative services. Budgeting tells the organization where to direct its resources during the coming year.

To start, management should determine the current financial “state” of your organization. Meaning, are the operations gearing up to grow significantly? Are programs changing or being realigned? Is a capital campaign or search for major gift(s) on the horizon? This will lead the financial management team to determine whether a surplus, deficit or break-even budget is desired.

#2 Not every organization should have a breakeven budget

Board members as well as members of management are all too often under the false impression that nonprofits can’t make money and must spend everything earned each year. The reality is that in order to sustain itself long-term, an exempt organization must earn a surplus at some point in its life cycle. There are also scenarios in which a deficit budget is practical for an exempt organization 

As we covered in #1 above, instead of asking how to balance a budget, management should be asking the more important question of “what are our financial goals and needs this yea.” Once that has been ascertained, the “type” of budget that is right for an exempt organization will become obvious.

If management determines that cash balances or reserve accounts are lower than they would like, they can steer the organization by proposing a budget where revenues exceed expenses. This is common when an exempt organization wants to pay down debt, increase reserve balances or during a capital campaign. At the end of a surplus year, the exempt organization’s net assets (net worth) will increase from the prior year and the organization will find itself in a stronger financial position.

A common reason for a deficit budget is the expansion or growth of programs or fundraising capacity. This is considered an investment in future operations of the exempt organization, but in the first year of this strategic change, expenses will generally exceed revenues, causing a deficit. Alternatively (and less frequently), management may determine that the cash and reserve balances are more than sufficient and some of that money should be spent down. This is typically done by a one-time large purchase or bonus to employees.

#3 There is more than one way to budget

When creating a new budget for the coming fiscal year, management can determine whether to develop an overall operating budget or a cash flow budget, or perhaps both. Cash flow budgeting is the preparation of a detailed plan which projects when cash will be received and used during the year. This allows management to plan for specific expenditures and receipts and does not take into consideration transactions such as depreciation. This is helpful for organizations that receive multi-year pledges or grants as the revenue is recorded in the year pledged, even though the cash is not received until future years. A cash flow budget would map the actual receipt and use of the cash associated with that pledge.

#4 Every budget is unique, but the process is the same

Based on our experiences in assisting exempt organizations of varying sizes in their budgeting process, the following basic steps should be followed in the preparation and approval of an exempt organization budget:

  • Run the current year actual financial data and annualize it to get an idea of where the current fiscal year will “land.”
  • Identify and document the programs and supporting services that carry out the organizational goals and objectives.
  • List out all assumptions or known changes to operations or programs that will affect the year being reviewed.
  • Using historical financial data and the recognized assumptions for future periods, begin outlining the budget for the year.
    • Estimate the revenue from all revenue sources
    • Estimate the cost of each program and supporting service
    • Compare estimate income with estimated costs and make necessary adjustments
  • Present the budget to top management for approval
  • The Board of Directors or Finance Committee should review and perform a final approval of the budget. Such approval should be documented in meeting minutes

Along the way, be sure to document the methodology and thoughts behind various assumptions and inputs. This will greatly increase the efficiency of budget to actual analysis as well as future year budgeting processes. Always keep in mind that an exempt organization’s budget is a management tool, a marketing tool, and a significant component of the organization’s internal control framework when used properly.

Please don’t hesitate to contact us at (714) 372-8110 or Info@EvergreenAllianceCPA.com if you have any questions regarding the foregoing or if you need any additional information whatsoever regarding the exempt organization accounting services which Evergreen Alliance provides.

Did you find this article helpful? You might also enjoy our three-part series on Nonprofit Accounting Quick Tips.