Budget and Financial Sustainability
Budget techniques are central to the successful operation of all organizations. This chapter introduces the budget and the budgeting process as key components of a financially sustainable nonprofit organization. A budget enables organizations to allocate scarce resources, control operations, and manage performance. A budget is the translation of an organization's plans and priorities. Readers will learn the basic concepts and practices of budgeting in nonprofit organizations. The chapter also explains the essential role played by budget approaches and techniques in the successful and sustainable operations of a nonprofit organization.
WHAT IS A BUDGET?
A budget is a plan that describes in monetary terms the income or revenue expected by an organization for a financial cycle and the allocation of expenses or expenditures, in order to achieve organizational goals and objectives, and consequently to fulfill the organizational vision and mission (Figure 7.1).
FIGURE 7.1 A nonprofit budget.
WHY A BUDGET?
A budget is one of the most critical documents that a nonprofit organization must have. A budget is the most accurate translation of the vision and mission statements of a nonprofit organization. The strategic plan makes statements about what an organization is striving to achieve. The budget provides substance and sets the means to get there. A budget anticipates income and expenditures over a period of time and facilitates effective planning. Without a budget, an organization can descend into chaos and simply dissolve. A budget provides benchmarks to establish efficiency in use of resources. With a budget an organization can easily monitor cash flow and identify departures from plans. A budget helps maintain a focus and discipline in financial decisions.
TYPES OF BUDGETS
The financial operation of a nonprofit organization involves several types of budgets compiled into a master budget. The most common types of budgets are an operating budget, an auxiliary budget, and a capital budget (Figure 7.2).
The master budget incorporates all the budgets of an organization. The master budget includes everything that an organization will be doing for an upcoming fiscal year. The master budget is also called the comprehensive budget, because it clarifies the other specific budgets in a more holistic context.
FIGURE 7.2 Common types of budgets.
The operating budget is a monetary plan that describes the expected income and expenditures of an organization. Organizations tend to develop their operating budget in two stages, which include a budget of revenues and a budget of expenses. The budget of revenues is a prediction of all income that a nonprofit organization anticipates to receive. The budget of expenses is based on the past budget, and current and future trends. There should be a detailed explanation and documentation for each line item of anticipated revenue. The same applies to the budget of expenses. A justification must be provided for each line item of expenditure. At the end of the process, the budgeted expenses are subtracted from the budgeted revenues to determine whether there will be a surplus or a deficit during the upcoming fiscal year.
The cash budget is a forecast for cash receipts and disbursements or payments to make on a quarterly or monthly basis. The cash budget is generally presented in the following format:
Generic Cash Budget Illustration
Beginning cash + ($10,000.00) + Cash receipt ($5,000.00) Subtotal: Available cash ($15,000.00) - Cash payment ($6,000.00) Subtotal ($9,000.00 )
+ Borrowing or - investments ($2,000.00 [borrowing]) Ending cash balance ($11,000.00 )