NFP Budgeting Tips

As the month of June comes to a close, many NFP organizations will have to close their books and begin their next fiscal year. This may also begin the dreaded budgeting process.  Many budgets are of dubious worth, often out of date before they are published.  In an effort to help NFP financial management,  I thought it would be worthwhile to discuss some often overlooked aspects of the budgeting process.  The inspiration for this blog comes from Gary Cokins, a prolific author and expert on the subject of managerial accounting.  He has some wonderful insights into the world of budgeting. 

Cokins states there are two general parts of the budget.  The first is demand driven.  This portion of the budget will take into account the expected activities of the organization for the year.  For instance, if the NFP has received a grant to perform certain services it must budget for those activities.  It will take into account the grant funding and any costs associated with it. The second part of the budget is the expenditure portion of the budget.  By expenditure portion we mean those expenditures driven by the mission, vision, and strategic plan of the NFP.  While these concepts are outside the scope of this article, any decent management book will cover these topics in sufficient detail. 

Cokins divides these expenditures into four types:

• Capex–Capital expenditures needed to achieve the plan for the year and the strategic plan over a number of years;
• Riskex–Expenditures needed to measure and control risk. Again, any management textbook will tell you that risk and reward can be two sides of the same coin;
• Opex–those expenditures needed to actualize the operating budget for the year: and 
• Stratex–Expenditures required to advance the strategic plan. 

Cokins believes by taking into account the demand driven requirements of  operations and the various types of expenditures required by the operating budget and the strategic plan, an organization can put together an insightful  budget that will also tie into the strategic plan. 

Some other words of advice on doing your budget:

• Don’t just budget to continue operating your organization as you have in the past.  Remember, standardization can often reduce costs.  It has been my observation that organizations treating each individual transaction or activity on an ad hoc basis will be inefficient and will often make mistakes; 
• Remember the power of technology.  Where can you leverage your operations and make them more efficient by automating your process flow? 
• Try to use the principles of activity based costing.  Funding sources often do not like to fund “overhead”. To the extent you can trace costs you can turn them into direct costs and more palatable to the donors and funding organizations.  

So, with these tips  in mind, I wish you good luck on your budget preparation for the year.  If you have any questions, please feel free to contact me!