The Important Role of Budgeting in Non-Profit Organizations

Authored By
Bridget Hartnett, CPA
enior !anager, o"el # Co$ Nonprofit and o%ial er&i%es 'roup
pring ())*
ABTRACT
This +hite paper first addresses the important role that a "udget plays in a
nonprofit organization and se%ondly offers insights and guidan%e on ho+ to +rite
a meaningful and pra%ti%al "udget$ 'oing through the e,er%ise of preparing a
"udget ena"les the leaders of the nonprofit to ma-e reasona"le fore%asts and
dra+ assumptions a"out the %ost of up%oming a%ti&ities, predi%t future sour%es of
re&enue and ultimately determine ho+ +ell the group.s mission statement +ill "e
a%%omplished$ It is a goal setting tool as mu%h as it is a measurement of the
su%%ess of those goals$
Ta"le of Contents
/efining 0Budget1
The Role of a Budget in the Nonprofit e%tor
The Budget Pro%ess
ample Budgets
Con%lusion
Resear%h Cited2our%es
A"out the Author
A"out o"el # Co$

/efining 0Budget1
The %ommon di%tionary definition for "udget is simply, 0the "rea-do+n of a
spending plan, a sum of money allo%ated for a parti%ular purpose and a summary
of intended e,penditures along +ith proposals for ho+ to meet them$1

In fa%t, the 3nglish +ord budget has an interesting history$ It deri&es from the
4ren%h +ord bougette, +hi%h means literally, a +allet, a purse or a 5little "ag$5 The
%onne%tion "et+een "ougette and "udget is made presuma"ly "e%ause one5s
entire +ealth %ould "e %ontained +ithin a purse 6 7ust as the organization.s +orth
is %ontained +ithin the "oundaries of a "udget$ The +ealth of the organization is
the 0purse1 of the organization, the pla%e +here one %an see the money %oming
in as +ell as the money sele%ti&ely going out$
4rom this original foundation, the +ord "udget has no+ e&ol&ed to refer to a
%omprehensi&e list of all planned e,penses and re&enues$ The most signifi%ant
+ord in this definition is the +ord 8planned. 6 +hi%h reinfor%es the notion that the
purpose of the "udget is to assist the organization in planning future a%ti&ities "y
fore%asting the e,penses asso%iated +ith &arious efforts along +ith anti%ipating
the amount of in%ome that +ill "e generated, as a%%urately as possi"le "ased on
information a&aila"le$
Ta-en together, all these definitions paint a %redi"le pi%ture of the purpose and
the ad&antage of ha&ing a "udget, in%luding the popular Internet definition
pu"lished "y 9ahoo that states, 0A "udget is a &alua"le a%%ounting and planning
tool for a nonprofit organization$ It assists the "oard and trustees in ma-ing
allo%ation de%isions of funds and pro&ides a transparen%y to donors$ It helps
guide future fundraising efforts$1
No matter +hi%h e,a%t +ording is most appropriate for your organization, the
%on%ept remains the same: A "udget is mu%h more than a %olumn of num"ers$ It
is, a%tually, a representation of an agreed upon strategy, a "lueprint, and a map
for the %oming year;s<$ On one hand it is %omprised of a series of edu%ated
guesses regarding funds that are e,pe%ted to "e re%ei&ed from donors, grants
and other re&enue generating sour%es$ On the other hand it also in&ol&es the
%ataloguing of pro"a"le e,penses$ By melding the t+o %omponents, the
organization is a"le to use good 7udgment to %omforta"ly fore%ast its a%ti&ities for
the short and long term$
The Role of Budgeting in the Nonprofit e%tor
3&ery nonprofit organization has a %ru%ial mission and an important purpose in
the %ommunity$ But it may ne&er "e a"le to a%hie&e its lofty o"7e%ti&es +ithout a
+ell-defined a%tion plan, in%luding timelines for implementation and a "udget$
ome nonprofits as- +hy they need to ha&e a "udget$ After all, if they ha&e held
a strategi% planning retreat, they -no+ +hat they +ant to a%hie&e$ They "elie&e
they are all set to mo&e for+ard and they are unsure of the additional ad&antages
of going through the pro%ess of de&eloping a "udget$ 4urther, they may ha&e
some %on%erns o&er "eing %onstrained "y the num"ers and the formality of the
pro%ess or fear of "eing held a%%ounta"le "y the results of 0a%tual1 &ersus
0"udgeted1 data$
Those groups that do not +ant to "e a%%ounta"le, that do not "elie&e that
+or-ing +ithin the limitations of a formal "udget= are the &ery groups that struggle
to stay afloat, espe%ially +hen times are tough$ >hat they may not realize is that
ha&ing a "udget gi&es stru%ture and su"stan%e to the organization.s plans$ The
"udget ma-es a strong statement a"out the group.s intentions as it indi%ates
+hat the nonprofit e,pe%ts to ta%-le in the %oming year, or years$ As importantly,
it pro&ides a +ay to monitor progress$ >hen an item is a%%ounted for in the
"udget, it "e%omes a tangi"le representation of the organization.s goals and an
a%-no+ledgment that resour%es +ill "e e,pended to support it$ It demonstrates a
proa%ti&e, thoughtful, deli"erate approa%h to %riti%al de%ision-ma-ing instead of a
less formalized pro%ess that is for%ed to rea%t to e&ery ne+ idea +ithout the
"enefit of ha&ing planned for the %ir%umstan%e$
By going through the pro%ess of +riting a "udget, the organization +ill "e fa%ed
+ith ma-ing some tough de%isions$ As a result of drafting the "udget, the
leadership +ill "e e,pe%ted to ma-e edu%ated assertions regarding the %osts of
its programming and ser&i%es, espe%ially re%ognizing the real limits that e,ist on
staff and &olunteer a&aila"ility, spe%ial s-ills, and other ne%essary resour%es$ The
"udget plays a -ey role, for%ing the organization to prioritize its a%ti&ities so as to
determine those that are most %riti%al for fulfilling its mission$ In addition to
de%iding on ho+ to spend their re&enue, a "udget pro&ides the do%umentation
that helps nonprofits %hoose the most effi%ient measures for raising money$

>ithout a "udget there %an "e %haos "e%ause there is no other +ay to
reasona"ly de%ide in ad&an%e +hi%h ideas or programs +ill "e pursued
and ho+ mu%h +ill "e allo%ated to promote them$
>ithout a "udget there is no +ay to determine if the finan%ial "en%hmar-s
are "eing met$
>ithout a "udget to follo+, o&erspending or under spending is li-ely to
o%%ur +ith potential serious %onse?uen%es$
The "udget should not "e +ritten in isolation, "ut rather, it +ill "e more effe%ti&e if
ta-en into %onsideration along +ith other planning tools and management
information$ ome nonprofits, mu%h li-e for-profit entities, get so immersed in
drafting the "udget that they lose sight of +hat the pro%ess is all a"out@ Instead of
seeing the "udget as a finan%ial instrument that %an help to manage operations
and predi%t in%ome, they see it as a pro7e%t to "e %ompleted, +hi%h, on%e
finalized, %an "e stored in a dra+er until year-end rolls around$
Nothing %ould "e further from the truth$ The "udget is a %onstantly %hanging
do%ument, and one that must "e referred to, and refle%ted on, regularly$ It is a
good approa%h to "e as fle,i"le as possi"le$ Rather than a"andon a sound
"udget plan +hen an unforeseen situation arises, the organization should instead
"e a"le to handle the %hange +ithin the stru%ture of the "udget$
To "e realisti% it +ill ha&e to "e re&ie+ed, and perhaps amended, as the situation
re?uires$ This year.s golf outing may not produ%e the targeted num"er of -ey
sponsors as in the past, +hile the 'ala attra%ts an unpre%edented re%ord %ro+d$
Programs and ser&i%es that dre+ fe+ users2parti%ipants last year may "e%ome
ne%essities in today.s tougher e%onomy$ >hate&er the issue, the role the "udget
plays is to ser&e as a guideline - "ut one that re?uires fine tuning and fle,i"ility
along the +ay$
It is a good idea to al+ays remain fle,i"le$ The one thing that is %onstant is
%hange, and sometimes "udgets must "e %hanged +hen e,pe%tations are not
met$ Rather than a"andon a sound "udget plan, +hen an emergen%y or
opportunity arises, an organization should "e a"le to handle the %hange in an
orderly fashion$
The Budget Pro%ess
Putting together a "udget for the first time is a little more %hallenging "e%ause
you most li-ely do not ha&e a%%ess to any histori% data gathered from pre&ious
years$ Be%ause you are starting +ith a %lean slate, you +ill ha&e to rely on
a%%urate predi%tions of the future 6 +hi%h is diffi%ult, espe%ially during a tur"ulent
and unpre%edented e%onomy su%h as the re%ession +e are %urrently
e,perien%ing$ The "est you %an do is %reate as reasona"le a list as possi"le of
e,penses and then assess your "est and +orse %ase s%enarios for generating
funding, +hether from indi&idual or %orporate donations, %ontra%ts, fees for
ser&i%es or grants$
As you %ompile information ea%h year, you +ill find it mu%h easier to "uild on that
foundation as you go for+ard$ Instead of using a %rystal "all approa%h, you +ill
"e a"le to ma-e sensi"le assumptions "ased on past performan%e$
In the nonprofit se%tor, there are usually t+o types of "udgets that are most
fre?uently used$
The first is a "road s%ope "udget that pro&ides information a"out the organization
as a +hole, loo-ing at all of the e,pe%ted re&enue for a defined period of time
and %hroni%ling anti%ipated initiati&es for the entire entity o&er the same period$
Tra%-ing performan%e ena"les the organization.s leaders to ma-e -ey de%isions$
The se%ond, more spe%ifi%, "udget is one that is program-dri&en or department-
dri&en$ 3a%h ma7or e&ent and ea%h distin%t department should ha&e its o+n
uni?ue "udget in order to ha&e the most a%%urate pi%ture possi"le of the le&el of
its su%%ess$
>hether the "udget is general or targeted, the steps remain the same:
tep One: /efine and 3&aluate 9our 3,penses$
>hen doing this, you must loo- at all of the operating %osts ;+hether general or
spe%ifi% to a pro7e%t or department<$ Not only is it important for you to ha&e a solid
grasp on +hat you spend, "ut it is e?ually important to ta-e the time to e&aluate
your e,penditures and determine +hi%h are most essential$ ometimes sa%red
%o+s ha&e to "e a"andoned, and the "udgeting pro%ess is a perfe%t time for
re&ie+ing all the organization.s %osts to determine if they are %entral to your
mission$
Based on your -no+ledge regarding %urrent %osts and pro7e%ting any %hanges
due to rising rates in the %oming year, you %an re%ord e,penses as either fi,ed,
semi-&aria"le or &aria"le$
4i,ed %osts remain %onstant$ They in%lude items su%h as rent, loan
repayments, and insuran%e$
emi-&aria"le %osts are %osts +ith "oth fi,ed and &aria"le %omponents,
su%h as telephone, salaries and +ages$ ;The fi,ed %omponent of this
e,pense is the minimum %ost of supplying programs or ser&i%es, +hile the
&aria"le %omponent %hanges depending on usage$<
Aaria"le %osts are dire%tly tied to e&ents, in%reasing or de%reasing and
%hanging +ith ea%h situation, gi&ing you some %ontrol o&er these
e,penses$ Be%ause they are not fi,ed, this is one area +here -ey
de%isions ha&e to "e made +hen programs ha&e to "e trimmed or
eliminated for la%- of %ash flo+$
tep T+o: 3stimate 9our Re&enue
To a%%omplish this, you +ill first need to esta"lish finan%ial goals for the
organization and then +or- "a%-+ards to plug in the appropriate types of fund
raising programs to generate the re&enue that +ill ena"le you to meet your stated
goals$ It is a good idea to -eep in mind that this is a goal rather than a predi%tion,
so you need to fo%us on ho+ to a%hie&e it in a pra%ti%al +ay$ The good ne+s is
that if the organization has "een running for some years, re&enue +ill "e mu%h
easier to predi%t a%%urately "ased on past performan%e$
If, for e,ample, you ha&e de%ided to raise BC million in ())*, and your annual golf
outing usually generates BD)),))), you -no+ that you +ill need to identify other
initiati&es or apply for grants +here you ha&e a reasona"le e,pe%tation for raising
the additional BE)),)))$
tep Three: !onitoring and Controlling the Budget
It +ould seem that drafting the "udget is the most diffi%ult tas-, "ut a%tually, that
is 7ust the "eginning of this &ery %ru%ial pro%ess$
On%e you ha&e set up the "udget, you +ill need to %ompare the predi%ted
num"ers to the a%tual figures e&ery month in order to loo- for differen%es and
esta"lish +hy they o%%urred$ This is +here the "udget "e%omes an effe%ti&e
management and operations tool for your organization$ The administrati&e staff
+ill +or- together +ith the Board of /ire%tors to ad7ust e,penditures or
fundraising efforts to ensure that the ne,t month.s num"ers are in line +ith the
"udget$ By di&iding the true %ost of ea%h program "y the num"er of people
ser&ed, you %an also analyze the %ost per unit of ser&i%e$ Based on this re&ie+,
you %an determine +hi%h pro7e%ts need to "e updated, a"andoned or left
un%hanged and +hi%h areas need to de&elop ne+ ideas as you ma-e progress
to+ards your mission$
To ha&e the "est possi"le out%omes, there are a fe+ pointers that finan%ial
e,perts re%ommend:
C$ A&oid the impulse to spend no+ and 0hope1 for funds to follo+$ This
tends to en%ourage a 0pie in the s-y1 attitude +here so mu%h is needed
that the re&enues ne%essary to pay for su%h a plan are not a&aila"le
e&en in the most optimisti% pro7e%tions$
($ /o not pad items to gi&e yourself +iggle room$ Instead, use the most
a%%urate num"ers possi"le so that the "udget does not "e%ome
distorted and therefore mu%h less &alua"le for planning purposes$
D$ Fse as mu%h detail as possi"le +hen defining %ategories or programs so
that a%ti&ities %an "e easily measured$
G$ 3n%ourage feed"a%- from all departments or %ommittee %hairs so that
you ha&e %onfiden%e in the data$ taff and "oard mem"ers must
parti%ipate in ea%h phase of the "udgeting pro%ess that affe%ts the line
items for +hi%h they +ill later "e responsi"le$ tay a+ay from %omments
li-e, 0that.s %lose enough1 +hen you are +or-ing +ith pro7e%tions$
H$ Be ready to "e fle,i"le and prepare to re&ise the "udget as needed$
I$ Fse the insights you gain from a monthly re&ie+ +isely$ If a pro7e%t or
program needs to "e %ut or fund raising needs to "e es%alated, "e
prepared to ma-e these &ital de%isions$
E$ /o%umentation of "udget assumptions and %hanges are %riti%al and +ill
pro&ide a "asis for impro&ing the effi%ien%y of the "udgeting pro%ess
ea%h year$
J$ Prepare "udgets that refle%t a%tual timing of re&enue and e,penses into
t+el&e e?ual parts$ By preparing monthly "udget "rea-do+ns and
%omparing them +ith a%tual dollars re%ei&ed and spent, you %an more
a%%urately dete%t real %hanges and re&ise the "udget a%%ordingly$
Sample Budget Worksheet
YTD Actual
2008 2008 2008 2009 2009
Actual Budget Quarter Quarter Actual
Sources of Cash
ra!ts
'rant C
'rant (
'rant D
'rant G

- -
"perat#o!s
4undraising 3&ent C
4undraising 3&ent (
4undraising 3&ent D
4undraising 3&ent G
4undraising 3&ent H
4undraising 3&ent I

Total Net 4undraising - -
"ther Sources
Contri"utions
Other
Interest
Other Programs
Total Other our%es of Cash - -
Total Sources of Cash - -
$ses of Cash
%rogram &'pe!se
Total Program Related 3,p$ - -
SA(%)& B$D&T
W"*+S,&&T - Co!t.d
"perat#o!s
Postage
Printing
upplies
Ca"le
Computer 3,penses
Telephone
Ban- # 4inan%e Charges
!aintenan%e
Auto2Aan
Payroll
3mployee Benefits
Payroll Ta,es
Audit
eminars, !em"erships
/e&elopment
Insuran%e
Consultant
Boo--eeping
A/P
Kegal
Total Operations 3,penses - -
Total Uses of Cash -
Total Surplus/0Shortfall1 - -
Con%lusion
It is %lear that e&ery nonprofit, no matter +hat size, should ha&e a prepared
"udget that %an a%t as a planning me%hanism, or road map, to -eep the group
fo%used on a%hie&ing its mission$ The staff and "oard should "e in&ol&ed in ea%h
step of the "udgeting pro%ess so that they +ill ha&e a sense of o+nership and so
that they %an "enefit from the information that is generated "y the "udget$
>hether they ha&e responsi"ility for programs, ser&i%es, fundraising or grant
+riting, e&eryone has a -ey role to play +hen ma-ing de%isions for the group$
The "udgeting pro%ess is, in good part, a sum of reasona"le e,pe%tations,
understanding that unpredi%ta"le e&ents may influen%e %osts and %ontri"utions
you %an still estimate e,penses and re&enues +ith a high degree of a%%ura%y
"ased on past e,perien%e$
3a%h step in the "udget pro%ess is important as the organization esta"lishes its
priorities, sele%ts programs to offer that are of signifi%an%e to its %onstituents and
finds inno&ati&e methods for fund raising$ Competition today %omes from lo%al
%harities and glo"al disasters, from neigh"orhood "attered +omen.s shelters to
aid for AI/ &i%tims in 'hana, Afri%a$ >ith ne+ te%hnology tools, the nonprofit
no+ rea%hes a limitless audien%e, "ut these tools must "e integrated into the
nonprofit.s o&erall strategy for gro+th$ Through a %ontinuous "udget pro%ess, the
organization is %ompelled to re&ie+ o"7e%ti&es a%hie&ed, %omparing "udget to
a%tual figures, and loo-ing at the trends that %an "e found "ehind the num"ers.
The organization also needs to indi%ate the importan%e of monitoring the
"udgeted num"ers to the a%tual num"ers and prepare to fine tune the "udget
throughout the year "ased on the realty of the situation$
>e re%ommend that the "udgeting pro%ess should "e approa%hed, not as a
painful e,perien%e to "e a&oided or delayed at all %osts, "ut rather as +ay for
you, the group.s leadership, to proa%ti&ely prepare and plan for the %oming year
to ensure that your mission +ill "e met$

Resear%h Cited2our%es
The resear%h %ondu%ted in +riting this +hite paper in%ludes information from:
+++$netfornonprofits$org$ 0Ho+ to !a-e a Budget: Nonprofit ur&i&al -ills for
())*1
+++$+i-ipedia$org$ 0Budgets1
+++$ans+ers$yahoo$%om$ /efine 0Budget1
+++$managementhelp$org$ 0Basi% 'uide to Non-Profit 4inan%ial !anagement1
+++$mi%rosoft$%om2dynami%s2o%ialer&i%es
+++$minnpost$%om$ 3%onomi% "riefing for nonprofits offers some optimism plus
reality %he%-s and strategies for ())*$
Nonprofit >orld$ Aol$ CH$ No$ G$ 0Create a Budget That >or-s for 9ou1
+++$all"usiness$%om$ 0Budget Basi%s: ome Ley Points to Remem"er for Non-
Profits1
+++$geo%ities$%om$ 0The Budget1
+++$aspirationte%h$org$ 0Budgeting for Nonprofits1
+++$idealist,org$ 0Budget # 4inan%e1
+++$e&an%armi%hael$%om2small-"usiness-%onsutling$ 0Ho+ To Prepare a
Budget1
+++$allian%eonline$org$ 04re?uently As-ed Muestions1
A"out the Author
Bridget Hartnett, CPA, a enior !anager at o"el # Co$, has more than t+el&e
years of e,perien%e in pu"li% a%%ounting +hi%h she dra+s on to pro&ide high
le&el ser&i%es for %lients$
Bridget spends most of her time +or-ing %losely +ith %lients in so%ial ser&i%es
and nonprofit areas, in%luding edu%ational institutions$ As the enior !anager
dire%ting the firm.s Nonprofit and o%ial er&i%es 'roup, Bridget super&ises the
audit engagements %ondu%ted "y o"el # Co$ for the Cere"ral Palsy Asso%iation
of !iddlese, County, the 9outh /e&elopment Clini% of Ne+ar- and the Catholi%
Charities of the Trenton, !etu%hen and Ne+ar- dio%eses, 4reedom House, and
C$N$ 4oundation$ In addition, she handles all of the firm.s edu%ation audits and
holds a Pu"li% %hool Auditor.s li%ense$
Bridget is also responsi"le for preparation of nonprofit, %orporate, partnership,
fidu%iary and indi&idual ta, returns$
Bridget %arries her %ommitment to so%ial ser&i%es "eyond the +or- pla%e to
in%lude her personal in&ol&ement in se&eral areas, su%h as at t$ Benedi%t5s
s%hool in Holmdel +here she is al+ays a&aila"le for &olunteering for pro7e%ts and
spe%ial e&ents as needed as +ell as gi&ing her resour%es and time to &arious
%hildren.s %harities, su%h as the Ne+ Nersey Chapter of !a-e-A->ish and others$
he is also a &olunteer +ith professional "usiness groups in the Ne+ Nersey
%ommunity, in%luding !onmouth O%ean County Nonprofit Committee and the
>estern !onmouth Cham"er of Commer%e +here she helped to found the
su%%essful 9oung Professionals. 'roup$ Bridget is also an a%ti&e mem"er of the
Ne+ Nersey CPA o%iety.s Nonprofit Interest 'roup$
As a li%ensed Certified Pu"li% A%%ountant in Ne+ Nersey, Bridget is a mem"er of
"oth the Ameri%an Institute of Certified Pu"li% A%%ountants ;AICPA< and the Ne+
Nersey o%iety of Certified Pu"li% A%%ountants ;NNCPA<$
Bridget graduated +ith her Ba%helor of %ien%e degree from !ont%lair tate
Fni&ersity$ he resides +ith her hus"and and t+o daughters in A"erdeen, Ne+
Nersey$
A"out o"el # Co$
o"el # Co$ is a regional %ertified pu"li% a%%ounting and %onsulting firm +ith
head?uarters in Ki&ingston, Ne+ Nersey$ The firm has "een pro&iding audit,
a%%ounting, ta, and "usiness ad&isory ser&i%es for nonprofit organizations in the
metropolitan area of Ne+ Nersey2Ne+ 9or- sin%e its in%eption in C*HI$
The nonprofit %ommunity "enefits "e%ause the firm is a"le to le&erage a
%om"ination of e,perien%e and s-ills to help %lients remain su%%essful$ o"el #
Co$ %urrently +or-s +ith more than CI) nonprofit organizations +ith re&enues
ranging from BC)),))) to o&er BI),))),)))$ Based on this depth of e,perien%e,
the professional team mem"ers are familiar +ith the issues fa%ing e&ery
organization and they apply this -no+ledge to "ring added &alue to e&ery %lient
and %olleague in the nonprofit se%tor$
Through a +ide range of edu%ational and net+or-ing programs, arti%les, +hite
papers, sur&eys and other industry resour%es, o"el # Co$ adds signifi%ant &alue
to nonprofit organizations in the Ne+ Nersey2Ne+ 9or- area$
Please &isit the +e"site at +++$so"el-%pa$%om to a%%ess a +ealth of nonprofit
materials, additional +hite papers, s%hedule of up%oming nonprofit e&ents and to
learn more a"out the Nonprofit and o%ial er&i%es 'roup$