You have a Mission to achieve a Vision that solves a Problem. You have well-thought Strategies that directly address the Problem. You know what Actions you need to perform to execute the Strategies.
Now you need a Budget.
A Budget covers at least one year. It is used to:
- authorize expenditures;
- help plan the actions to be performed;
- determine income needs;
- manage cash flow throughout the year;
- measure what you have done against what you intended to do; and
- support grant applications.
A Budget is a feasible, acceptable, baseline.
- Feasible means things could happen this way. It is not a forecast.
- Acceptable means that if things do happen this way, everyone is happy.
- Baseline means that it is the standard of measurement. This also means that it does not change during the year.
Even though the budget does not change, it is not a ball and chain. If needs change during the year, as they most certainly will, you can authorize variances to the budget. By not changing the budget itself, you will be able to maintain traceability. I will explain the importance of that in a later post.
The Board starts the Budget Process.
In the ideal world, the budget process starts when the board issues the budget guidelines to the staff. The board says to the staff, “Here is what I want the budget to look like. If you bring me a budget that meets these guidelines, we will approve it without changes or qualifications.” There should be no bring-me-a-rock surprises.
At a minimum, the guidelines should tell the staff how much income to expect, how much is available to spend on general expenses and on projects, and some compensation guidelines. But that is the bare minimum.
A better set of guidelines would describe the expected sources of the income and the expected amounts for each department.
Even better than that, the board should state how much they are willing to pay to pursue each of the strategies in the Strategic Plan.
Sadly, few boards are willing to go that far.
But there is hope. The wise Executive Director will have prepared a pro forma budget well in advance of the board’s discussion guidelines. Then he goes to key board members and asks, “What do you think of this?” Then he can make changes, if necessary, and propose that the board use his pro forma budget as the guideline. This is a form of One Text Negotiation.
You should calendarize your budget.
Calendarize means to build the budget month-by-month. Some budget lines have equal payments in each month, such as salaries and rent paid monthly. But most items will vary by month. For example, donations usually peak just before the end of the calendar year as donors feel more generous before Christmas and many review their year-end tax status. There may also be special campaigns planned for certain months or special events that generate fees. Utility fees will vary by month with higher electricity bills in the summer and higher gas bills in the winter.
Here is an example of the Calendarized Expenses:
The last line is titled Net Expense, which is really Net Income with the formula signs reversed. This is because this particular board was used to just controlling expenses and not looking at expense as a negative income. I would recommend using Net Income instead, since that is the terminology your auditor will use.
The expenses are graphed as negative numbers since they are unfavorable to income. More about that in a future post on monthly financial management.
Calendarization is necessary for accurate monthly reporting and cash management.
The next post will talk about what you do with this budget.