The Budgeting Process Nonprofit Accounting Basics

School: Franklin University - Course: PUAD 740 - Subject: Accounting

Reporting and Operations The Budgeting Process Note: Articles published before January 1, 2017 may be out of date. We are in the process of updating this content. Originally Posted: July 28, 2010 Topics:Financial ManagementBudgeting and Strategic PlanningThe budget process is the way an organization goes about building its budget. A good budgeting process engages those who are responsible for adhering to the budget and implementing the organization's objectives in creating the budget. Both finance committee and senior staff participation is built into the process and a timeline is established leaving adequate time for research, review, feedback, revisions, etc. before the budget is ready for presentation to the full board. The annual budgeting process should be documented, with tasks, responsibility assignments and deadlines clearly stated. A good budgeting process also incorporates strategic planning initiatives and stipulates that income is budgeted before expenses. Fixed costs are identified and related to reliable revenue. Budgeting decisions are driven both by mission priorities and fiscal accountability. Steps for developing a good budgeting process: 1.Write it down. Many organizations "have" a budget process, but it is not written down. Putting your process into writing creates a measurement tool against which you can monitor your progress and creates a checklist to ensure thoroughness in the process. When written down, the process becomes a durable management tool possessed by the organization rather than an intangible thing in the head one or two individuals. Institutionalize the process by writing it down. SeeAnnual Budget Process Example Template. 2.Decide who should be involved and when. The executive director and program director(s) naturally play a significant role in the budget process, but departmental staff members who have responsibility for adhering to budgets should also play a role in creating those budgets. It builds buy-in and the process is informed by those with direct experience "in the trenches". Unless you have a board functioning as quasi-staff, usually staff members know more about operating details than board members, even very involved ones. In general, it is probably more efficient for staff to create the early drafts of budgets and use the time of finance committee members to review and vet the proposed drafts. 3.Establish an annualized timeline. Start earlier. Many funders require budgets for the following year far earlier than small and midsize organizations customarily get serious about budgeting. Aim for having the budget approval by your board at least two months before the new fiscal year begins. Earlier is even better, if feasible. You know your peak business cycle - integrate the annual budget process into a time during the year when key participants, paid or volunteer staff, have the time to focus on it. 4.List specific tasks with specific responsibility assignments. Within the timeline, list tasks specifically, e.g., "Distribute departmental budget worksheets and prior period financial data for reference" or "Research costs of database software". Even though many people may contribute to a task, pick one person to take leadership responsibility for making sure it happens. If the responsible person knows he or she will be held personally accountable to have completed the assigned task by the deadline, it is more likely to get done. Accounting andBookkeeping Audit Financial Management Tax and Information Filings Governance Resources Accounting 101Starting a Nonprofit Internal Controls Internal Reporting & Financial ManagementNonprofit Operating Reserves Initiative (NORI) Videos

3/17/23, 5:13 PMThe Budgeting Process | Nonprofit Accounting Basics https://www.nonprofitaccountingbasics.org/reporting-operations/budgeting-process2/3Linking Detail to Summary 5.Ensure that budget line items and accounting line items are in sync. Budget line items should align with accounting (financial statement) line items, and the structure of the full operating budget should match the chart of accounts (the structure of the accounting system), to ensure effective comparisons between budget and actuals. A mismatch between budget items and accounting items creates extra work for administrative staff or key volunteers who must translate between the two and risks inconsistencies that undermine the usefulness of financial reports. Especially for expenses, when accounting/financial statement line items exist without corresponding budget line items, it can result in budget overages or erroneously reported line item balances.