BUDGETING
Part 4—The Operating Plan Presentation and Other Budget Topics
THE OPERATING PLAN PRESENTATION
One of the many valuable lessons I learned from my board treasurer in my early, tender years is that a budget is more than a budget; it is a twelve-month operating plan.
Before approving a budget the board wants to know “how are we doing?” in the current year and how next year will be the same or different. Board members need to feel confident that next year’s planned operations will keep the organization on solid footing and that plans are in place to make midcourse corrections if necessary. The successful presentation will be clear, concise, and comprehensive. (Click here for a discussion on how much information is too little or too much in a board presentation.)
If your organization has a finance committee, they will provide the valuable service of reviewing the presentation in depth before it goes to the board. Board members breathe a sigh of relief when they are told that the finance committee has reviewed the plan and recommends their approval.
Here is a sample table of contents for the operating plan presentation.
- Next year’s condensed budget compared to this year’s year-end forecast
- Current period balance sheet
- Summary of points to be voted on
- Highlights: current year forecast
- Highlights: next year’s budget
- Contingency plans
- Capital budget
- The budgets
1) Next Year’s Condensed Budget Compared to This Year’s Year-End Forecast
I always start with a condensed, consolidated budget which collapses all cost centers, including M&G, into a single column. This is presented side-by-side with the year-end forecast column along with explanations for significant differences. For a $1 million budget I would explain differences in excess of, say, 10%, or $5,000. This tells the whole story at a high level and is therefore a good place to start (more on that here).
2) Current Period Balance Sheet
I have discussed the balance sheet here, pointing out why the board of any but a very small nonprofit should be provided with a balance sheet with every financial report, including the budget. Not every board member is comfortable reading a balance sheet, but the financially savvy board members will want to review today’s asset and liability balances along with the proposed revenues and expenses for the coming year.
3) Summary of points to be voted on
You can facilitate the board’s process of voting on the operating plan by providing a list of the actionable items contained in the plan. For example:
Examples:
- Changes in compensation and fringe benefits
- New programs
- Program closures
- New capital acquisitions
- New borrowing
- New fundraising initiatives
These examples all require board approval to enact. Approval of the budget will encompass all actionable items and will sometimes suffice as approval for say, a compensation increase effective the first day of the coming year. Other items will require separate board action when they occur. Spelling out the actionable items gives the board the sense that they understand exactly what they are voting to approve and what to expect in the coming year.
4) Highlights: Current Year Forecast
The operating plan highlights provide narrative detail. Current year highlights include specific information about programs that have not operated as expected, as well as explanations for programs that experienced either surpluses or deficits.
5) Highlights: Next Year’s Budget
Budget highlights include new programs, closed programs, or programs that will operate differently next year. Additions or reductions in staffing, plus programs experiencing financial difficulties will be noted, along with any organization-wide changes such as infrastructure upgrades, fringe benefits plan changes, or new borrowing. You might note the M&G ratio here. (endnote) This is also a good place to inform the board of any potential changes in the funding or regulatory environment.
6) Contingency Plans
What do I mean by “contingency plans”? A board will be more comfortable passing a budget that has an “escape route” should funding cuts occur.
Examples of contingency plans:
- Scheduling across-the-board salary increases to occur halfway through the year, giving management the option to forego them if necessary.
- Making your 401k plan employer match after the end of the year contingent on board approval.
- Scheduling capital purchases or routine equipment replacements for later in the year so management can postpone them if disaster should strike.
- Plans for emergency fundraising appeals to be carried out if necessary.
7) Capital Budget
A capital budget is needed if you are planning expenditures for items such as equipment, real property, or major software. Capital items are not usually included in the operating budget because under GAAP (generally accepted accounting principles) they are depreciated over their useful lives. To include or not include depreciation in your budgets is addressed here.
Your capital budget would note the item to be purchased, cost, useful life, the cost center, and source of cash to cover the purchase.
8) The Budgets
The cover sheet for the budget section is the consolidated budget broken out by cost center, including the M&G cost center. This is where the breakout of M&G expense can be found. (See Example 9 here.) Individual budgets for each cost center follow the consolidated budget.
The presentation package is not complete without the budgets, and without you and your team’s efforts to produce them there would be no operating plan at all. But if items 1 through 7 provide a condensed budget and thorough narrative explanation, not all board members will feel the need to examine the individual budgets in all of their glorious detail. I therefore recommend placing them at the end of the presentation package.
OTHER BUDGET TOPICS
Software
General ledger software programs usually offer budget capability in the sense that the budget numbers can be uploaded to the software for the purpose of running budget-to-actual reports. But I have not seen GL software that is adequate for creating a budget from beginning to end. For starters, I have never seen GL software that provides a payroll worksheet from which salary data can be transferred to the cost center budgets.
The process I have described in my examples throughout this series uses spreadsheet software to produce budgets for a handful of cost centers. If you are a multi-million dollar nonprofit, however, you might benefit immensely from specialized budgeting/reporting software. A number of products provide an array of budgeting options such as monthly budgeting (see below), fine-tuning of your payroll calculations, and automation of cost allocations, including M&G.
These products also provide reporting functionality with GL data integration, opening up possibilities for data analysis and forecasting that your GL software cannot provide. The ability to provide a finely-tuned forecast with your monthly financial report could prove transformative for your organization. As I discussed here, forecasting provides deep insight into the organization’s operations and is a powerful tool for decision-making.
A good budgeting/reporting product will demand a large investment of money and time, especially in training. Without the support of executive management and the commitment of all the users, you run the risk of failure to use the software to its fullest capacity. On the other hand, the rewards of a full implementation cannot be overstated.
Monthly Budgeting
Many revenue and expense items do not occur evenly. Ideally you would like to budget grant and contribution revenues in the month they are expected, and certain expenses in the month they are to be paid. It would be too onerous to budget by month with spreadsheet software because you would have to input data into twelve columns (one for each month) for every cost center on your budget worksheet. As I noted above, specialized budgeting software offers the advantage of monthly budgeting.
Whether you use spreadsheets or specialized software, you should be able to upload your budgets to your GL software. Virtually every GL software package (including Quickbooks) is able to store your budget numbers so that monthly budget-to-actual reports can be produced throughout the year.
In our examples here Community Helpers has created annual budget numbers for every revenue and expense for every cost center and now wishes to integrate this data with the GL software. Converting CH’s budget spreadsheets to a file that the GL software can read should be a simple matter.
CH’s budget numbers are annual, but to offer the capability of printing monthly reports, the GL software needs to populate every budget revenue and expense field for each month for every cost center. Once the budgets are uploaded, CH’s GL software will divide the annual budget numbers evenly by twelve to populate the required fields.
You might want to adjust the budget data once it has been uploaded to the GL, for, perhaps, a few grant or contribution revenues that you know will come in unevenly. The budget data is now sitting in the GL software in separate fields for each month. The software may have the capability of allowing you to make manual adjustments.
Alternatively, you might export your budget-to-actual report to a spreadsheet program each month and make changes there. Narrative explanation of budget variances is, of course, an option as well.
Budgeting for Unconditional Grant Revenues and Expenses
I regret that I do not have a good solution to the problem of budgeting for programs where the grant revenue was unconditional and therefore recognized in a prior year. If you need to better understand the concepts that underly “revenue recognition” see essays 13 through 15 on marymightknow.com.
Though I can’t solve the problem, I can explain it: Let’s say that in 20×1 you were awarded a two-year grant of $50,000 for your food pantry but you were required by GAAP to record the entire amount in 20×1. Assuming an otherwise break-even year, and dividing the expenses evenly between the two years, this resulted in a surplus of $25,000 in 20×1 because you only spent half of the funding. $50,000 of revenue was closed out to net assets in 20×1 and $25,000 was offset by year-one expense, but the other $25,000 was recorded as surplus.
Now, for the 20×2 budget you have no revenue to offset the year-two $25,000 that you will spend according to the grant agreement. The pantry’s cost center budget will have to show a deficit of $25,000 which will flow to the consolidated budget bottom line. You will have to remind the board that the entire $50,000 was recorded in 20×1 and the offsetting revenue of $25,000 is waiting in net assets to be united with the 20×2 expense when the books are closed for the year. (You will have to continue to remind the board of this throughout 20×2.)
WE MADE IT!
Budgeting is complex, many-faceted, critical to the success of the organization, and—if you are an accounting nerd like me—fun. In my view, nonprofit CFOdom is project management more than anything else. Making a budget happen from the first item on the calendar to board approval will challenge you, bring you closer to the team, and give you a marvelous sense of accomplishment when that final vote is successfully taken.
Endnote
The M&G ratio is calculated by dividing organization-wide total M&G cost by total expense before M&G. (This is illustrated here.)