Zero-Based Budgeting

Zero-based budgeting is mostly for newly formed organizations that are starting from scratch. A zero-based budget is based on the priorities set from the strategic plan of an organization. The budget is based on assumptions set in the goal-setting stage. The zero-based budget is articulated around a justification for each line item. Let us consider the case of The Appleton Cancer Awareness Foundation (ACAF), which is a newly created not-for-profit organization that aims to increase awareness on breast cancer in Appleton. To this end, ACAF plans to organize outreach activities and community training, and conduct community-based participatory research on breast cancer in Appleton. Mr. Smith, a benefactor in Appleton, commits to donate $500,000 for the start-up. The board of directors includes community and business leaders who will pay their annual membership dues totaling $100,000. As chair of the planning committee, you are asked to develop the start-up budget based on the following assumptions:

1. ACAF will hire: (a) an executive director (salary = $60,000 per year), (b) an administrator (salary = $40,000 per year), (c) a development coordinator (salary = $35,000 per year), (d) an administrative assistant (salary = $25,000 per year), (e) and a janitor (salary = $20,000 per year).

2. ACAF requests that you add 20% of total employee salaries for fringe benefits.

3. With respect to "Facilities, equipment, and supplies," ACAF anticipates the following expenses:

- $2,000 per month for rent

- $1,000 per month for utilities

- $500 per month for repair

- $500 per month for copy rental

- $3,000 per year for postage

- $100 per month for telephone

- $300 per month for office supplies

- $500 per month for liability insurance

4. For program expenses, ACAF will spend

- $12,000 per year for travel

- $36,000 per year for outreach activities

- $60,000 per year for training

- $120,000 for research

5. Finally, ACAF will organize fund-raising activities, which will involve the following expenses:

- $2,400 per year for special events

- $1,200 per year for social networking

- $2,400 per year for publication and literature

Considering the above assumptions, the budget will be something like the following (Table 7.5):

TABLE 7.5 Budget for Appleton Cancer Awareness Foundation

Appleton Cancer Awareness Foundation

Budget Fiscal Year 2012-2013

Revenue

Total in U.S. dollars

Membership

100,000.00

Donation

500,000.00

Total revenue

600,000.00

Appleton Cancer Awareness Foundation Budget Fiscal Year 2012-2013

Expenditures

Administrative expenses

Salaries

Executive director

60,000.00

Administrator

40,000.00

Development coordinator

35,000.00

Administrative assistant

25,000.00

Janitor

20,000.00

Fringe benefits

36,000.00

Total salaries

216,000.00

Facilities, equipment, supplies

Rent

24,000.00

Utilities

12,000.00

Repair

6,000.00

Copy rental

6,000.00

Postage

3,000.00

Telephone

1,200.00

Office supplies

3,600.00

Liability insurance

6,000.00

Total facilities, equipment, and supplies

61,800.00

Program expenses

Travel

12,000.00

Outreach

36,000.00

Training

60,000.00

Research

120,000.00

Total program expenses

228,000.00

Fund-raising

Special events

2,400.00

Social networking

1,200.00

Publication/literature

2,400.00

Total fund-raising

6,000.00

Total expenditures

511,800.00

Surplus (deficit)

88,200.00

Performance-Based Budgeting

The performance budget is informed by performance reports developed by financial managers. The performance budget links performance goals and cost of goal attainment. Efficiency and productivity (cost per activity) constitute the baseline of performance goal costs.

Priority-Based Budgeting

Priority-based budgeting focuses on organizational priorities (goals and objectives). This budgeting approach starts with a review of existing services and ranks them based on whether a service is essential, highly desirable, or beneficial. Criteria and scale will vary from one organization to the next, and are usually adopted by the board of directors.

BUDGET AND FINANCIAL SUSTAINABILITY

The budgeting process and practices in a nonprofit organization play a key role in future financial sustainability. For example, many organizations intentionally include long-term projections into the annual budget. They update the projections each year, by taking into account the key social and economic factors affecting long-term projections (e.g., fiscal trends on national output, prices, and interest rates), and with the assumptions that the baselines for such projections will not change significantly. Further, nonprofit organizations can develop 5-year budgets, adjusting for key fiscal assumptions that underline long-term projections. Then, they would revise each upcoming fiscal year budget based on current realities. This will enable them not only to assess the accuracy of long-term projections used, but also to provide a preview regarding whether the budgetary process is an effective contributor to drive the organization on a path for financial sustainability.

 
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