Importance of Budgeting for Nonprofit Organizations

School: Southern New Hampshire University - Course: ACC 325 - Subject: Accounting

Southern New Hampshire University ACC 325 | Accounting for Nonprofit Organizations 4-3 Short Paper: Budgeting

Preparing a Budget Budgets are essential for an organization's programs, mission, and strategic planning. There are several key steps to prepare a budget. First, it's important that an organization determines a timeline for planning their budget. This ensures that there is plenty of time allowed to discuss various needs and options, and still be ready for board approval before the next fiscal year begins. It's also important that the finance committee understands the current financial status of the organization. That is, they need to review the current year's income and expenses compared to the budget. The committee then needs to develop a draft expense budget to help determine expected costs, as well as a draft income budget to project what their fundraising and revenue activities will bring in. After this, they need to review the draft budget to ensure that it meets the goals they had previously discussed, and make adjustments as needed. From here, the budget is presented to committees as well as the Board of Directors for approval. Once the budget is documented, it can then be implemented (Propel Nonprofits 2023). As previously mentioned, there are several considerations to take into account when preparing the budget. First and foremost, the organization must agree on goals. This can include prioritizing program delivery goals, as well as setting organizational financial goals (Propel Nonprofits 2023). The reason this is important is because it begins a framework that the committee can follow in order to achieve these goals. For example, if they know they want to begin a specific program, but that will require $1,000 to get it off the ground, then they know that needs to be worked into the budget. But if they aren't in agreement that this particular program is a priority, then it can create tension, or the program will end up eliminated because it's been decided to use the funds elsewhere. In this respect, it's very important that the committee is on the same page regarding goals when preparing the budget.

Another important consideration to take into account when preparing a budget is the financial status of the organization. The income and expenses of the current year, as compared to the budget set for that year, will tell a lot in regards to the budget. For example, maybe too much funding is being allocated for supplies, but not enough was earmarked for electricity. Or maybe the original budget was based on a certain rate, which changed mid-year, and so is now costing more. But comparing what was anticipated against what actually occurred, it can help determine how to more efficiently designate funds for various accounts and programs. A budget committee should be put in place to develop the budget for the upcoming year. The budget committee should be knowledgeable of the organization and its operations, especially its goals and objectives. They should want to serve the organization as a whole, and also have some knowledge of budgeting in general (VSPCA 2012). Once they follow the necessary steps to create a proposed budget, it's important to follow up with committees to ensure that they haven't overlooked any program necessities or goals that the committee or department was hoping to accomplish. If everything seems copacetic, then the budget committee can then present the budget to the Board of Directors for approval. Ideally, the budgeting process should occur at least three months before the current fiscal year ends. This is to ensure plenty of time to review and make adjustments as needed, and have the budget approved, prior to the new fiscal year beginning. There is some flexibility within the budget preparations, however I believe it's important to have a draft ready for review a month prior to the end of the fiscal year. This allows ample time for adjustments, as well as receiving final approval from the Board. Ongoing Monitoring It's important for a nonprofit organization to continue to monitor the budget after it has