Using Your Budget As A Tool Suggestions

Often budgets seem useful only at the beginning of the fiscal year or at the start of a new project when they provide a blueprint for managers and program staff.  The budget identifies the amount of funds needed to be raised to run the organization or project and the plan for spending those funds.

However, budgets can carry a far more important function.  When used monthly, they can serve as a barometer that measures if you’re raising the funds needed to support the organization or program and if you’re spending the funds you predicted you would spend. 

If a monthly financial report is used to monitor both sides of the equation, problems can be identified early and solutions developed such as raising more funds, cutting expenses or redesigning the program.

In addition, the organization’s or program’s success at meeting that year’s budget guidelines can be factored in when planning the next year of the program or the next program.

Here are some ideas for using your budget as a tool:

• Your monthly budget should be based on known and expected revenues and expenses, categorized by month.
  

• The budget should indicate the time period covered – typically the fiscal year for an organization budget or the program year for a program budget.
  

• Expenses and revenues, both one-time and on-going, should be budgeted in the month you expect them to occur, with the understanding that you can’t always be sure.
  

• Because revenues and expenses are likely to come in and go out unevenly throughout the year, each month’s revenue does not have to equal that month’s expenses (and most likely won’t).  However, if your revenue exceeds your expenses, you must have adequate cash reserves to cover your expenses until your revenues catch up.
  

• For an organizational budget, both administrative and program revenues and expenses, for all programs combined, should be included.
  

• Appropriate budget categories for both revenues and expenses are listed under Topic 1, Developing a Proposal Budget.
  

• Many revenues and expenses can be determined by looking at past revenue streams (e.g. last year’s annual fund results) and past bills and evaluating if they are likely to remain steady, increase or decrease depending on organizational and program plans.
  

• Without past documentation, make estimates for every known or expected revenue and expense.  You can estimate by talking to other non-profits, suppliers and program staff about pricing and needs.
  

• Include a miscellaneous budget category in case unknown or missed expenses surface.
  

• Once your budget has been approved by your organization’s Board, no changes should be made without Board approval.

Here are some tips for using your monthly financial report:

• On a monthly basis, it is wise to examine your success at meeting your budget guidelines, both for that month and year-to-date, by developing a monthly financial report.
  

• The variance (difference between what you budgeted and what you raised or spent) shows your success at meeting your budget plan.  (E.g. if you expected to raise $40,000 in your annual fund that month but actually raised $45,000, you will have been more successful than you planned on.)
  

• The variance as a percent of your budget (computed by dividing the variance amount by the budget amount for that time period) shows the magnitude of the discrepancy.  (E.g. a 5% difference between actual and budget during any month is far less significant than a 40% difference.)
  

• By examining your year-to-date budget guidelines vs. actual every month, you can evaluate the progress you are making toward reaching your budget goal and make adjustments, as needed.
  

• Negative income variances or positive spending variances (you’ve raised less or spent more than expected) obviously signal a concern and suggest a course correction may be needed.  However, positive income variances or, particularly, negative spending variances can also raise a red flag;  the underspending can indicate the program is not being implemented as planned.
  

• It is helpful to keep an eye on the total annual budget by category when analyzing the year-to-date status;  depending on the amount left to be raised or spent during the remaining timeframe of the budget, you may be able to adjust fundraising or spending to still meet your goals.
  

• The foundation of your monthly financial report is your monthly budget;  they should work hand in hand.  If Board-approved changes are made in the budget, the Budget columns of your monthly financial report must be updated in order for it to remain an effective tool.
  

• It is wise to set internal standards to highlight when a closer look at fundraising and/or operations is needed.  For example, if revenues or expenses reflect variances of a certain percentage or greater in one month or over several months, a formal review by management should be initiated.
  

• Be sure to accurately track your actual revenues and expenses during the fiscal year in order to report them on your federal tax return, Form 990.

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