A budget should be based on data that can be objectively examined. The data-gathering stage helps collect information that will justify line items and sections in a budget. For example, data on specific revenue should be based on trends, facts, and authentic documents. Similarly, data on anticipated revenue should be based on forecasting and facts. If anticipated revenues and expenses are not fact based, the budget will be useless.
Past Budget Analysis
Except for a newly formed nonprofit organization, past budget analysis should be conducted when developing a budget for the next fiscal year. Past budget analysis helps participants learn from possible under- or overbudgeting, and avoid repeating the same mistakes.
Internal Stakeholder Inputs
Internal stakeholders should contribute to the development of a new budget based on their position in the organization and their level of expertise. Some stakeholders can only make vague suggestions because of their limited influence or knowledge of budget development. Other stakeholders may be more involved because they are better positioned to provide specific information. Regardless of the level of involvement, internal stakeholders should see the budget development process as a team project, not because someone said so, but because they felt involved and saw their input taken into consideration. This can help create a sense of belonging to the organization, and may affect internal stakeholder commitment to the vision promoted by the organization.
A budget starts as a draft, called the proposed budget or budget proposal. The development of a budget proposal varies by the policies in place in every organization. Some organizations develop their budget proposal through a top-down approach. In that case, the leadership develops the budget and submits it to the board for approval. If a top-down culture exists, the board will simply approve the budget. Other organizations adopt a bottom-up approach. The leadership invites all units to develop their specific budgets, especially budgets of expenses. The unit budgets may be organized into categories according to the organizational design. The process of harmonizing the unit budgets continues until a master budget proposal is developed.
Budget Proposal Review
A budget proposal undergoes the scrutiny of various internal stakeholders, such as managers, program directors, the chief financial officer, the chief executive officer, and the finance committee. The order can be different in any given organization. What is consistent is that almost every stakeholder will make some changes, minor modifications, or suggestions.
Typically, the chief executive director and the finance committee find common ground on the budget proposal, and submit it to the board of directors. In most cases, the board will make changes to ensure that the budget reflects the strategic plan and strategic priorities of the organization. The presentation of the budget is made in one meeting. The proposed budget is more likely to be approved in a subsequent meeting. The board of directors votes on the modified version of the budget proposal.
Communication and Implementation
Once the budget proposal is voted by the board of directors, it becomes the approved budget. The executive director has the responsibility to communicate the adopted budget to the rest of the organization and oversee its accurate implementation. The implementation is done through allocation of the funds to various programs, projects, and activities. Sometimes, the allocation reflects the inputs provided by the internal stakeholders. Other times, the staff gets frustrated because budgetary allocation does not reflect their needs.
FIGURE 7.5 Budget-variance analysis.
Financial managers have the responsibility to provide weekly, monthly, quarterly, or annual financial reports regarding revenues and expenses in the light of the adopted budget. The monitoring is done through the variance report. The variance report compares the adopted revenues and expenses with the actual ones (Figure 7.5). The variance report helps monitor ongoing progress in the implementation of the budget. In addition to the variance report, financial managers of nonprofit organizations must develop cash flow management reports and performance reports. The cash flow management report informs one about the liquidity of an organization or the availability of cash for ongoing operations. The performance report tells how much is spent on each unit of service and per client. The performance report describes the efficiency of the budget in relation to services provided. Finally, the executive director and the board of directors must continuously review the budget to ensure that the implementation is being successful, and take corrective measures, if necessary.