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A five-step-guide-to-budget-development


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A five-step-guide-to-budget-development

  1. 1. A Five-Step Guide to BudgetDevelopmentInstituting “Team Decision-Making” in the Budget Process All material herein © 2012 Fiscal Management Associates, LLC. All rights reserved.
  2. 2. • Supports organizational planning and decision making on how to allocate resources• Establishes a benchmark against which to monitor financial activity and results• Provides a tool to: – Put strategy into operation – Control spending – Communicate plans and expectations – Minimize the possibility of fraud – Support long-term financial health and sustainability 2
  3. 3. 1. Assemble a Budget Team2. Create a Budget Calendar3. Prepare for and Conduct Budget Kickoff a) Set financial goals b) Gather data and build budget template c) Conduct team kickoff meeting4. Draft the Budget a) Forecast current year results b) Budget expenses and revenues c) Assemble the organization-wide budget d) Secure board approval e) Forecast cash flow5. Monitor the Budget a) Create mid-year revision if necessary 3
  4. 4. 1. ASSEMBLE A BUDGET TEAM The Budget Development Process 4
  5. 5. • Team Decision Making (TDM) fosters collaboration across the organization, encouraging staff to work together to: – Define goals – Allocate resources – Monitor progress• TDM provides program and other non-finance staff with the skills and tools to contribute to the budget development process and monitor the budget for their area of responsibility. 5
  6. 6. Team composition and titles will vary based on organization size and structure, but thisis a typical configuration. Chief Executive Officer (CEO) Program and Human Department Managers Chief Resources Director Financial Officer (CFO) with Finance Staff Board Development Treasurer, Director Finance Committee 6
  7. 7. • The Chief Financial Officer leads the budget development process: – Creates a budget calendar – Designates a budget team (with CEO) – Creates a budget template – Assembles necessary materials (historical financials, etc…) – Leads a budget kickoff meeting – Presents the budget to the board’s finance committee (with CEO)• Depending on organization size, the CEO or board treasurer may also lead aspects of the budget development process 7
  8. 8. 2. CREATE A BUDGET CALENDAR The Budget Development Process 8
  9. 9. • The CFO drafts the calendar which includes meeting dates and deadlines.• The calendar typically starts six months before the upcoming fiscal year.• Separate calendars should be established for budget monitoring and internal reporting and other aspects of fiscal management. 9
  10. 10. Budget Development Calendar Fiscal Year End: June 30 January February March April May JunePrepare mid‐year budget revision for current fiscal year based on actual results for Q1 and Q2Obtain Finance/Audit committee approval of mid‐year budget revision for current fiscal yearBegin next fiscal year budget process; identify Budget Director and Budget Timetable; gather information necessary to develop expense and revenue budget for the next fiscal yearAssemble draft budget for next fiscal year, incorporating fiscal and program personnelCirculate draft budget and budget narrative to Finance/Audit Committee; incorporate comments and recommendationSend budget package to Board of Directors; Board meets to approve budget for next fiscal yearIncorporate next fiscal years board‐approved budget into organizations accounting systemUpdate cash flow templates for coming 12‐month period 10
  11. 11. 3. PREPARE FOR AND CONDUCT BUDGET KICKOFF The Budget Development Process 11
  12. 12. • In conjunction with the board of directors, the CEO and CFO set overall financial goals, considering: – Anticipated increases or decreases in program activities – Operating results strategy • Break-even? • Surplus? • Planned deficit? – Strategic plan and long-term goals 12
  13. 13. Gather Data Build a Budget Template• CFO and finance staff assemble • CFO and finance staff build a historical results by program and blank template for each program department: and department: – Current fiscal year budget – Contains all line items under the – Remaining budget for the relevant manager’s control current fiscal year (“controllable costs”) – Current year-to-date actuals – Includes columns for the – Prior year budget and actuals remaining months of the current fiscal year and 12 months of upcoming fiscal year 13
  14. 14. • The CFO rolls out the budget development process in a kickoff meeting.• All staff involved in the budget development process attend. • Introduction to the budget • Communication of financial goals The • Distribution of blank budget template, historical data, and Agenda general ledger account definitions • Instructions on next steps • Staff questions 14
  15. 15. 4. DRAFT THE BUDGET The Budget Development Process 15
  16. 16. • Managers of programs/departments use the budget template to forecast remaining expenses by month for the current fiscal year. – Helps the finance staff update the organization-wide forecast • Where will the organization be at the end of the current year? (i.e., break-even, surplus, or deficit) • How does this relate to and impact financial goals for the upcoming year? – Indicates how reflective of reality the current year’s budget was – Prepares staff to project expenses and activities for the upcoming fiscal year 16
  17. 17. • Initial expense budgets should reflect best estimates of what it truly costs to run programs/operations . – Adjustments will be made later in the process if the level of budgeted expenses cannot be supported.• Managers of programs/departments use the budget template to project personnel and direct other-than-personnel (OTPS) expenses. – Indirect expenses such as occupancy will be allocated across programs and functions by the finance staff later in the process. 17
  18. 18. • The development director projects revenue anticipated from individual donors, foundations, corporations, special events, and other non- government sources.• Finance staff, with support from other staff as needed, project revenues from government entities based on existing and anticipated contracts.• Program staff, with support from finance staff as needed, project fee-for- service revenue streams based on past performance and future plans. 18
  19. 19. • If there is high uncertainty around revenue projections, draft a scenario budget reflecting the likelihood of receiving each source.• Next, draft expense scenarios ranking potential reductions.• Board approved benchmarks to trigger action can be implemented. – Example: If $A funding from B funder doesn’t come through by C date, $X of specified expense reductions will be made. 19
  20. 20. • Finance staff pulls together the organization-wide budget based on the completed budget expense templates and revenue projections – Indirect costs are allocated to programs using a consistent methodology, such as one of the following: • Headcount (FTEs) • Percent of salary dollars • Square footage or other facilities utilization measures – Revenues are matched to expenses by program.• The CFO presents the draft budget to senior management. – If adjustments are needed to align budget with financial goals, templates are redistributed to program/department managers with instructions on level of necessary adjustments. 20
  21. 21. CFO submits draft budget to the finance committee six to eight weeks before the new fiscal year Senior management and finance staff make revisions Once approved by Finance Committee, submit to full board Full board approves before the new fiscal year beginsOnce the budget is approved, the CFO conducts an information session to orientmanagers to the overall organizational picture and to their budget for the year. 21
  22. 22. • Once the budget is approved and finalized, the CFO and finance staff should develop a cash flow forecast showing the expected timing of cash receipts and disbursements over the course of the fiscal year.• This forecast should be updated and monitored over the course of the year to identify in advance any potential cash shortfalls that may need to be addressed. 22
  23. 23. 5. MONITOR THE BUDGET The Budget Development Process 23
  24. 24. Reporting Monitoring• Finance staff enters the approved • The CFO and senior management budget into the accounting software. analyze variances between budgeted• Managers begin to approve and actual revenues and expenses. expenditures against budgets for their – Discuss root causes with area of responsibility. appropriate manager• Finance staff produces monthly – Create action plan to address reports for: significant variances – Program, development and department managers – Senior management – Board 24
  25. 25. • Internal reporting should provide timely, reliable and relevant information. – Supports program-level decision making – Facilitates senior management in making strategic financial decisions to support long-term sustainability• The following reports are recommended on at least a quarterly basis: – Program, department and development directors • Budget-to-actuals for area of responsibility, including variances – Senior management • Budget-to-actuals by program, including variances • Reports distributed to the Board – Board of directors • Management budget narrative highlighting significant activity • Consolidated budget-to-actuals, including variances 25
  26. 26. • In many cases, it is advisable to develop a formal budget revision around the mid-point of the year. You should consider a budget revision if: – Actual revenues or expenses exceed pre-established thresholds for budget revision – Unanticipated events occur which alter financial expectations in a significant way – Programmatic or financial goals change in ways that affect financial plans• Note that the revised budget becomes the new standard by which the organization sets its revenue and spending plans. As with original budgets, budget revisions should be formally approved by the board. 26
  27. 27. The following resources available on The Wallace Foundation’s Resources for Financial Management website can assist you with particular elements of the budget process described in this presentation:• Fiscal Management Activities Calendar – Click here• Program-Based Budgeting Template – Click here• Revenue Analysis Worksheet – Click here• Cash Projection Template – Click here 27
  28. 28. FMA is a management consulting firm established in 1999 to serve not-for-profitorganizations around the country. – We provide customized financial management, accounting, software, organizational development, human resources, and other consulting services. – We work directly with organizations or through funder-supported management and technical assistance programs.FMA works to build a nonprofit sector where every organization practices the sound and effective management necessary to carry out its mission. For additional information please contact: Hilda Polanco, CPA John Summers Managing Director Manager 212-931-9240 212-931-9133 440 Park Ave South, 3rd Floor 440 Park Ave South, 3rd Floor New York, NY 10016 New York, NY 10016 28