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Nonprofit Budget Development

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Presented by Russell Pomeranz, MBA &
Terence Cook, MPA
November2009
The Latino Nonprofit Financial Management Initiative i...

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Standards of Excellence
Organizations plan based on reliable
statistics from historical performance, while
maintaining a s...

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Budget Calendar
July Aug Sept Oct Nov Dec Jan Mar Apr May June
Begin budget development
process
Assemble draft budget by
c...

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Nonprofit Budget Development

  1. 1. Presented by Russell Pomeranz, MBA & Terence Cook, MPA November2009 The Latino Nonprofit Financial Management Initiative is a project by the Hispanic Federation and presented in partnership with Fiscal Management Associates. Latino Nonprofit Financial Management Initiative Session 3: Budget Development
  2. 2. Standards of Excellence Organizations plan based on reliable statistics from historical performance, while maintaining a strategic look to the future Key Indicators: ▪ Key organizational decision-makers are involved ▪ Budgets reflect relevant historical financial data and organization’s goals ▪ Budgets are developed at relevant levels ▪ Cash flow monitoring instruments are developed and used Financial Planning 2
  3. 3. Budget Calendar July Aug Sept Oct Nov Dec Jan Mar Apr May June Begin budget development process Assemble draft budget by compiling departmental budgets Present draft organization budget to Finance Committee Finance Committee presents budget to Board Board approves FY10/11 budget Develop program goals Identify revenue streams Identify expenses Capture assumptions in budget template Review and negotiate Review and negotiate Feb Review and negotiate ED’s review & negotiation Board sets FY 09/10 organization's goals Board receives FY 08/09 audited financial statements Board approves FY09/10 budget modification Present Q4 results to management Review operating results to create “Budget Narrative” Evaluate program goals Monitor revenue streams Manage expenses Develop departmental budget teams Budget Development and Monitoring Calendar (June 30th Year‐End) 2009 2010 ED’s review & negotiation Chief Financial Officer 3 Board Senior Management Team Finance Committee Legend Executive Director
  4. 4. Themes Throughout the Budget Process 4 ▪ What’s the story? ▪ What are the options? ▪ What are the trade-offs? ▪ What impact does that have on the bottom line?
  5. 5. Developing the Budget Narrative 5 ▪ Elements of the Budget Narrative - ▪ Section 1: Telling the “Big Picture” story ▪ Section 2: ▪ a) Presenting financial statements & key data ▪ b) Explaining financial reports & data ▪ c) Present opportunities and concerns for the current fiscal year ▪ Section 3: Provide insight into the longer term
  6. 6. Developing the Budget Narrative cont’d PURPOSE: The primary purpose of the Budget Narrative Tool is to encourage a forum for discussion and decision making related to the organization’s strategic financial direction and goals. The formulation of the Big Picture is based on the analysis of the organization’s financial statements and relevant financial data. STRUCTURE OF THE BUDGET NARRATIVE Section 1: Telling the “Big Picture” Story The opening section of the Budget Narrative tells a story. The story line revolves around whether the organization is viable, sustainable, and has a strategic business model which enables it to fulfill its programmatic mission. The positive story explains how success is expected to continue. However, since not all story lines are bereft of drama, the realistic story explains the uncertainty of what could happen as well as what financial decisions could, should, and will be made. Different than traditional novellas, the riveting ending focuses on whether an organization can expect to meet its specific organizational financial goals. The opening of the Budget Narrative is an important opportunity for the CEO and CFO to evaluate the organization’s overall financial performance and present it in ways which best articulate and highlight their understanding and interpretation of the “Big Picture”. The writer can approach the “Big Picture” from a number of different angles, including, but not limited to, a combination of the following. a) Frame the organization’s budget narrative from in the perspective of time, telling the story in the context of the past with an eye to the future. A five year historical chart tracking net income, total revenue, administrative costs, and/or net asset growth including temporarily restricted net assets, paints a very informative picture. b) Focus on a particular program or department whose success or failure is indicative of the fortunes of the entire organization as well as the current year’s programmatic strategy. c) Focus on the strategic plan, if one exists, or several strategic decisions the organization has recently made impacting the current and future fiscal years. Explore the impact of the decisions which have been made and implemented as well as the expected impact of those being considered. d) Discuss the competitive environment in which the organization operates. Evaluate competitors and indicate how the organization has responded to changing market forces. e) Focus on critical organization decisions that are on the horizon. Discuss how these decisions relate to the “Big Picture”, present and future. 6
  7. 7. Developing the Budget Narrative cont’d Section 2a: Presenting Financial Statements and Key Data The section focuses on the financial data that supports the “Big Picture”. It presents what management considers the most important numbers. These key numbers are usually found in the analysis of the following reports: a) Unrestricted, Temporarily Restricted, and Permanently Restricted Fund Balances o Estimate the impact of current year projections on end of year fund balances. These numbers should be compared to prior year fund balances and trends should be noted. o Unrestricted Net Assets may also include a Board restricted endowment. o Temporarily Restricted Net Assets may be more of an estimate if based on projections. b) Current Year Organizational Net Income (the bottom line) o Provide financial statements, indicating whether the organization is running a surplus or deficit. o Compare projections for the fiscal year to the budget. o Variance analysis to previous fiscal years may be useful. c) Financial reports identifying profit and loss for specific projects and departments o Reports include administrative departments and fundraising, and the sum of department results roll into organization totals. o Identify areas of significant growth or decline. d) Financial reports outlining financial models in current fiscal year and beyond o Some indication of future financial position or whether the business model will hold is often necessary. Early in the fiscal year, a listing of revenues may be a good indicator of the success of the future year. Later in the fiscal year, a financial report resembling a net income budget or forecast might be more appropriate. This may also require putting together a financial model, describing what would need to happen in order to get to the desired financial result. e) Reconciliation to the Audited Financial Reports o Issues of timing or one time entries (i.e. balance sheet clean-up) are not always included in the financial reports to the Finance Committee. If this is the case, then additional reporting tracking potential one-time entries and their impact on the fiscal year can explain differences between fiscal year projections and audited financial reports. 7
  8. 8. Developing the Budget Narrative cont’d Section 2b: Explaining the Financial Reports and Data Build a bridge between the numbers reported on the financial statements and the organization’s programmatic and operating results. Guide the reader through some or all of the following questions: a) What do the numbers mean? b) What are the variances between the budget, forecast, and previous fiscal year operating results? c) What is the organization doing differently, what changes have been made, and have these changes “worked”? d) Are their unanticipated factors or changes which are to the organization’s benefit or detriment? e) What analysis did the Finance department undertake to better explain why things happen? For example, did management take a closer look at the bottom line results of performance based contracts, administrative expense vs. indirect cost rates, diversity of funding sources, aged accounts receivable balances, temporarily restricted net asset balances, etc.? f) How will the strategic plan, or specific projects or departments be instrumental to the organization’s success going forward? Section 2c: Present Opportunities and Concerns for the Current Fiscal Year Connect last fiscal year’s results with plans for the current fiscal year. Discuss the opportunities and concerns for the upcoming fiscal year that will impact the organization’s financial reality. Contingency plans to be determined or are at various stages of implementation should be discussed. a) Outline the opportunities and their significance not included in the budget or forecast.. What is the probability of such occurrences? b) What are the organizational financial concerns not included in the budget or forecast? What could go wrong? c) What changes or decisions (strategic, staffing, focus, investment, etc.) could be made to provide new programmatic opportunities and relevant revenue streams d) What expense reductions might alter the net income equation? What are their pecuniary and non-pecuniary impacts? This could be a list of contingencies to enact if the financial situations worsens or does not improve. Would significant cuts compromise organizational efficiency? 8
  9. 9. Developing the Budget Narrative cont’d Section 3: Provide Insight into the Longer Term In concluding the budget narrative, indicate whether the current business model will sustain a financially viable organization. Reiterate management’s evaluation of the strength or weakness of the organization financial position. Potential questions to explore at the end of the story may include: a) What are the projections for next fiscal year’s revenues, expense, and bottom line? b) Are there decisions that can be made now (pricing, cost reductions, investment, etc.) that will impact the future? What is the financial impact of non-recurring investment in planning, programs, staff and administration into future years? c) What needs to happen for the business model to hold up in the long term? d) Are there obstacles to business model success, internal and external? These might include: competition, macro economic uncertainties, trends among funders, rising costs, the anticipated loss of programs, etc. 9
  10. 10. Developing the Budget Narrative: Year 5 Year 4 Year 3 Year 2 Year 1 How ending balances become next year’s starting position July Start of January OctoberApril New Fiscal Year August 10 September DecemberFebruary March November May June
  11. 11. Developing the Budget Narrative: How ending balances over time become organizational trends Year 3 Year 2 Year 1 11 Year 4 Year 5
  12. 12. 12 What are the Options? - Revenues Program/ Department Funding Source Total Revenue Originally Anticipated Likelihood of Receipt (%) Total Revenue After Discounting Gap Notes on Impact of Funding Decrease Program A Government contract A 70,000 50% 35,000 May mean a decrease in number of meals served to seniors, a core program service - - - - - - Subtotal $ 70,000 $ 35,000 $ 35,000 Program B Grant from foundation A 50,000 75% 37,500 Could mean a significant reduction in number of children served in after-school program Grant from foundation B 10,000 25% 2,500 - - - - - Subtotal $ 60,000 $ 40,000 $ 20,000 Development Special event ticket sales 113,000 50% 56,500 Less unrestricted funding to support under-funded gov't contracts may mean cutting program services - - - - - - Subtotal $ 113,000 $ 56,500 $ 56,500 Management& General Board donations 100,000 75% 75,000 Less unrestricted funding for M&G activities may necessitate reducing capacity in ITor finance units Investment income 40,000 0% - - - - - - Subtotal $ 140,000 $ 75,000 $ 65,000 Total Revenue $ 383,000 $206,500 $176,500
  13. 13. 13 What are the Options? - Expenses Program/ Size of Revenue Gap Description of Proposed Cost Impact to Delivery of Core Mission Total Cost Remaining Gap Notes on Impact of Proposed ReductionsDepartment (fromrevenue worksheet) Cutting Measure Minimal Moderate Significant Savings Program A Decrease # of meals served in Senior Center 6,500 Decrease in provision of coreservice Delayhiring of Program Assistant for 6 months 20,000 No impact to mission -- will increase workload for current staff in the interimFringesavings 4,000 Renegotiate contract w/ program supplies vendor 2,000 No negative impact Subtotal $ 35,000 $ 26,000 $ 6,500 $ - $ 32,500 $ 2,500 Program B Eliminate counseling program for children Critical reduction in provision ofcore mission service for after-school program participants Salary of part-timeProgram Counselor 28,000 Supplies for counseling program 3,500 Subtotal $ 20,000 $ - $ - $ 31,500 $ 31,500 $ (11,500) Development Eliminate Development Associate position 50,000 May reduce ability to raise future revenue Fringesavings 6,500 Subtotal $ 56,500 $ - $ 56,500 $ - $ 56,500 $ - Management & General Postpone the hiring of ITassistant 40,000 No mission impact --will increase workload for IT staff in the interim Fringesavings 8,000 Increase employee contribution to med. insurance 8,000 may impact staffmorale Subtotal $ 65,000 $ 56,000 $ - $ - $ 56,000 $ 9,000 Total $ 176,500 $82,000 $63,000 $31,500 $176,500 $ -
  14. 14. What are the Trade-offs? – Making the Hard Choices 14 ProgramA ProgramB Development Management & Administratio n Total Total Anticipated Revenue Gap (35,000) (20,000) (56,500) (65,000) (176,500) ProposedExpense Reductions:Minimal Impact (26,000) - - (56,000) (82,000) Subtotal: Remaining Gap (9,000) (20,000) (56,500) (9,000) (94,500) ProposedExpense Reductions:Moderate Impact (6,500) - (56,500) - (63,000) Subtotal: Remaining Gap (2,500) (20,000) - (9,000) (31,500) ProposedExpense Reductions:Significant Impact - (31,500) - - (31,500) Subtotal: Remaining Gap (2,500) 11,500 - (9,000) - Total Proposed Expense Reductions (32,500) (31,500) (56,500) (56,000) (176,500) TOTALREVISEDSURPLUS(GAP) (2,500) 11,500 - (9,000) -
  15. 15. The Budget Development Steps ▪Step 1: Assemble materials & determine goals ▪ Step 2: Determine programs & activities ▪ Step 3: Identify significant support functions ▪ Step 4: Budget expenses ▪ Step 5: Budget revenues ▪Step 6: Identifying the Unknowns Get it done! 15
  16. 16. Step 1: Assemble Materials 16 ▪ Last full year’s budget ▪ Last full year’s actual revenue and spending history ▪ Current year’s budget ▪ Current year-to-date’s actual revenue and spending ▪ Forecast of current year’s ending balances ▪ Develop the organization’s Budget Narrative
  17. 17. Step 1: Assemble Materials cont’d 17 ▪ Collect and review data: ▪ How did the organization perform? ▪ Budget surplus / deficit ▪ Increasing / decreasing reserves: ▪ Unrestricted net assets ▪ Temporarily restricted net assets ▪ Permanently restricted net assets ▪ Last year ▪ Last 3 years ▪ What trends are developing?
  18. 18. Step 1: Assemble Materials & Determine Goals ▪ Will the organization’s business model meet the goals for: ▪ Finance ▪ Program ▪ Administration ▪ Stakeholders ▪ Mission ▪ Fixed Assets ▪ Strategic Planning 18
  19. 19. Step 1: Assemble Materials & Determine Goals cont’d 19 ▪ What are the organization’s: ▪ Reserves? ▪ Goals for developing reserves? ▪ How do we translate those goals into budget priorities?
  20. 20. Step 2: Determine Programs & Activities 20 ▪ Assemble the budget development team ▪ A role for any lead officer is to test all assumptions and gather data from as many sources as possible ▪ Gather information from sources closest to the point of delivery
  21. 21. Step 2: Determine Programs & Activities cont’d 21 ▪ Core Programs ▪ Program activities ▪ Resources required ▪ Anticipated Programs & Activities ▪ Additional resources required
  22. 22. Step 2: Determine Programs & Activities cont’d Agreed Budget Priorities 22
  23. 23. Step 3: Identify Significant Functions 23 ▪ Changes to necessary support functions ▪ Do you now need a dedicated HR resource? ▪ Do you now need a dedicated IT resource? ▪ Do you need to start or expand a grant management function and/or a Development function? ▪ Do you need to lease more space, add maintenance staff, or outsource maintenance support? ▪ How do changes to program capacity affect the allocated amounts?
  24. 24. Step 4: Budgeting for Expenses 24 ▪ Develop a program-based budget template ▪ Require each budget development team to submit a completed budget submission ▪ Develop a consolidated budget of all the plans ▪ Decide if the consolidated budget achieves the Budget Narrative priorities ▪ Renegotiate budget submissions
  25. 25. Step 4: Budgeting for Expenses cont’d Expenses generally fall into one of two categories ▪ Personnel Services (PS) ▪ Other Than Personnel Services (OTPS) PS 25 OTPS
  26. 26. Step 4: Budgeting for Expenses cont’d 26 ▪ Salaries ▪ Fringe Benefits ▪ Payroll Taxes ▪ FICA / Medicare ▪ State Unemployment Insurance (SUI) ▪ Mandatory Insurance ▪ Workmen’s Compensation ▪ Disability ▪ Voluntary Insurance ▪ Health Insurance ▪ Long-Term Disability ▪ Pension - 403(b) or 401(k) (voluntary)
  27. 27. Step 4: Budgeting for Expenses cont’d 27 ▪ Full Time Employees ▪ Mandatory taxes and insurances, medical plan for employee only 18% to 23% ▪ Mandatory taxes and insurances, medical plan for employee only, pension funding of 5% 23% to 28% ▪ Part Time Employees ▪ Mandatory taxes and insurances, does not qualify for medical plan or any other voluntary benefit plan 10% to 13%
  28. 28. Step 4: Budgeting for Expenses cont’d 28 ▪ Space ▪ Supplies ▪ Printing/copying ▪ Transportation ▪ Insurance ▪ Depreciation
  29. 29. Step 4: Allocation of Expenses 29 ▪ Salaries ▪ Time sheets ▪ Time studies ▪ Employee attestation statement ▪ Fringe benefits ▪ Salary dollars ▪ Headcount (F.T.E.) ▪ OTPS ▪ Salary dollars ▪ Headcount (F.T.E.) ▪ Square footage ▪ Facilities use studies ▪ Indirect Cost Rate
  30. 30. Step 5: Budgeting for Revenues 30 ▪ Myths ▪ We can’t afford to create a reserve ▪ My board wants a “balanced budget” ▪ Funders don’t want to see a “surplus” ▪ Reality ▪ Aim to add to reserves each year ▪ An unrestricted reserve is crucial ▪ Most funders want the organizations they support to be financially secure
  31. 31. Step 5: Budgeting for Revenues cont’d 31 ▪ Grants ▪ TRNA balance from pervious year(s) ▪ Grants and contracts ▪ Individual donations/Membership/Annual fund ▪ Special events ▪ Program service fees ▪ Other revenues ▪ Endowment allocation/Investment ▪ Earned Income ▪ Unrelated Business Income
  32. 32. Step 5: Budgeting for Revenues cont’d 32 ▪ Justification for deficit spending: ▪ The deficit is for a specific purpose and there is a reliable plan to earn the funds in a future period ▪ The organization can fund the deficit from their reserves ▪ Each organization needs to determine the method and amount of its contribution to reserves ▪ % of excess of revenue over expenses ▪ % of operating budget ▪ % of revenues ▪ % of earned income ▪ Accounting for revenue uncertainty/discounting
  33. 33. Step 6: Plan for Identifying the Unknowns ▪ What if…. ▪ Revenue changes? ▪ Expenses change? ▪ What can we do to respond to the unknowns? ▪ Contingencies plan ▪ Opportunities tracking ▪ Develop strategy 33
  34. 34. Financial Monitoring & Analysis: Session 4 What are the operating results telling us about the organization’s business model? Key Indicator: Trend in Unrestricted Net Assets How current performance affects the future June 30th Year-end Year 6 34

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