Budgeting in the Current Economic Environment
By Lee Klumpp
In the not-for-profit world it is often the case that the budget is not issued on time, nor is the first issuance typically the last. Instead there are a multitude of last minute changes that force the budget process to continue into the next year. As a result the budget may not be usable on a comparison basis as an effective management tool until several months into the next year.
The best solution to this problem is to develop a robust budget process using a flexible budget model. An organization that has a tightly structured budget process that includes deadlines and procedures that are specific to due dates and activities and states when these activities will occur and by whom has a better chance of having a working and effective budget model sooner than later. The budgeting process should include a detailed review process where budget line items are challenged and vetted through the various stakeholders of the organization to ensure that only those activities that are related to the organization’s mission and programmatic activities are supported by the budget and are approved.
Key assumptions utilized in the budget preparation should be noted either right at the top of the budget model or clearly noted in the footnotes on the corresponding budget page. It is also extremely helpful to note how these assumptions may have changed from the previous year’s budgets either by showing information in the commentary or by presenting the prior year information in a separate column in the budget. Examples of assumptions are revenue projections, salary increases, benefits, IT support costs, occupancy costs and a myriad of other items. Senior management should make sure that all assumptions are reasonable before they spend a significant investment of time reviewing the presented information.
Assumptions should be built into the budget model, so that a change to an assumption will result in an immediate change throughout the budget model. For example, changes to the revenue forecast for a change in contribution revenue will immediately have an effect on the amount of funds available for certain programmatic activities that are tied to that specific revenue stream.
Revenue is by far the most reforecasted number in a budget, so every time these numbers change an expense will have to be adjusted in proportion to the change in revenue in order to have a balanced budget. Using a flexible budget model will largely eliminate the most tedious part of updating a budget which is altering the myriad of revenue and expense line items every time someone makes a change. This can be a time consuming task for accounting staff that are responsible for maintaining the budget, and also for the senior management team who is responsible for reviewing and approving the budget.
It is also reasonable to tie certain expenses to other levels of activities such as head counts, square footage or program goals. For example, rent expense could be allocated based on square footage used by departments or communication expense (telephone and internet) could be allocated based on head count.
A flexible budget is built around well-defined, well-grounded assumptions that are appropriately vetted through all stakeholders and is an excellent control tool and an effective way to measure an organization’s performance.
A well planned budget process and a timely prepared budget is critical in these uncertain economic times since it imperative that non-essential activities be eliminated from the budget. One of the issues that organizations get caught up in during rough, economic times is across the board reductions in the budget. Although this may solve the immediate need for expense reductions it is only a temporary solution. The results of this type of cost cutting measures often have dire consequences in programmatic and development activity and it can take years to erase the effects.
In performing an analysis of areas to modify the budget to adjust for the effects of the current economy, an organization should consider such factors as program results and the desire for the program by the members of the organization. The budget, along with actual expenditures, should be used to identify programs where expenses exceed the revenue generated. Programs that are faced with this issue need to be examined to determine if there is a valid reason for not making changes as well as to determine where future funding will come from. A budget based on reasonable assumptions that has been updated for the current economic events will be a solid tool for making tough business decisions in the current economy.
For more information, please contact our Nonprofit Services Group at 440-449 6800 or Lee Klumpp, Assurance Senior Manager and Member of the Institute for Noprofit Excellence in BDO Seidman’s Greater Washington, D.C. office at lklumpp@bdo.com.
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