The Building
Blocks of
Budgeting
How to prepare meaningful and
manageable budgets for your
organization
Presented by:
Susan R. Lucato, CGA
Susan Lucato, CGA
 14
Years Grant Thornton Chartered
Accountants
 9 Years Victoria Foundation
 2 Years consulting practice
 Active local volunteer
 www.susanlucato.com
 Presentation
materials will be on-line
TODAY
The Building Blocks of Budgeting:
 Definition
 Development – steps in the process
 Budgeting process
 Best Practices
 Preparation
 Components
 Key terms / terminology and other important
considerations
What is a Budget?
“A budget is the numerical expression of an
organization’s dreams that serves as a
guide or measure of acceptable financial
performance.”
Jody Blazek from
Financial Planning for Non-Profit Organizations
What is a Budget?
A well constructed operating budget will
demonstrate in numbers the organization's
commitment to fulfilling its mission. It will be
based on reliable income projections and
expense projections will be wellresearched, conservative, and thorough.
Those building the budget will understand
what components of it are fixed and which
can be adjusted as the budget year
progresses.
Steps for Developing a Good
Budgeting Process - Overview
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Write it down.
Decide who should be involved and when.
Establish an annualized timeline.
List specific tasks with specific responsibility
assignments.
Ensure that budget line items and accounting
line items are in sync.
Develop worksheets, templates, and tools
that promote inclusion of all relevant budget
components and facilitate "what if" scenarios.
Budgeting Process
The annual budgeting process should be
documented, with tasks, responsibility
assignments and deadlines clearly stated.
A good budgeting process:
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engages those who are responsible for adhering to
the budget in the creation of the budget,
allows time for the Finance Committee to
participate,
provides adequate time for research, review,
feedback, revisions, etc. before the budget is ready
for presentation to the full board,
Budgeting Process (cont’d)
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incorporates strategic planning initiatives,
is characterized by realistic projections for income
and expense
is income-based (expenses do not exceed the
realistic income projections)
identifies fixed (indirect) costs and relates them to
reliable revenue,
is driven both by mission priorities and fiscal
accountability
Best Practices - Budgeting
1.
2.
3.
4.
5.
6.
7.
Practice income-based budgeting
Analyze and understand your revenue
concentrations
Confirm your budget's relationship to your
mission and long range/strategic goals
Don't forget infrastructure
Budget for capital in addition to operations
Provide narrative notes to explain budget
assumptions to the board
Pay attention to presentation
Who is the budget for?
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EVERYONE in the organization – culture
Who prepares – key staff, ED and Treasurer
Who reviews – Finance Committee
Who approves – Board of Directors
Who is ultimately responsible – Board of
Directors
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NOTE – key staff who prepare budgets should
have their performance reviews include the
results that are IN THEIR CONTROL
Budget Preparation - Steps
1. Key staff, usually accountant / bookkeeper
prepare draft budget documents based on prior
year and known upcoming commitments
2. Key staff and ED meet to review draft and add /
subtract items based on ED’s knowledge of
upcoming year
3. Key staff, ED and Treasurer meet to review draft
after changes in #2 have been made – further
changes based on board strategic initiatives and
Treasurer feedback
4. DRAFT Budget goes to Finance Committee for
review & comments
Budget Preparation - Steps
5. Changes updated by key staff
6. Final DRAFT approved by Finance
Committee, “The Finance Committee
recommends the budget be presented to
the Board of Directors for approval”
7. Board reviews, questions and approves
budget
8. FINAL APPROVED BUDGET saved in
electronic files, all other versions should be
removed, this budget is NOT changed again
during the year.
Approved Budget
Approved Budget vs. Year-end Forecast
A budget is a forecast or financial plan made at a point in
time with the best information at hand.
As an organization progresses further into the budget year, it
only makes sense that better information will become
available that would change the previously expected
outcome in one or more line items.
However, unless there has been a truly major change in the
organization's structure or programs, it is generally not a
good practice to change a budget once a budget has
been approved by the board.
It is better to create a column on financial reports that shows
a Year-End Forecast, or Year-End Projection, based on the
new information, and to explain any significant variances
from the original budget.
Budget line items and Accounting
line items - MATCH
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.
Budget components
 Organization
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budget:
Operating
Capital
 Department
/ Project budgets:
Income
 Capital
THESE ROLL INTO ORGANIZATION BUDGET
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Work part-to-whole
The format of the budget to be presented to the
board need not have the level of detail that staff
or finance committee members see.
Using detail worksheets as tools to build a "Full
Budget" and a "Summary Budget" allows staff and
finance committee members to go deep into the
trees while presenting the forest to the board.
Link these worksheets, or workbook tabs, to a Full
Budget sheet in a single, multi-tab workbook.
Later we’ll look at some examples in EXCEL
BREAK TIME – 15 min
Operating Budget
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Associated with Statement of Revenues &
Expenditures(Income Statement, Profit & Loss)
Planning income and expenses for a single
fiscal year to accomplish immediate mission
agenda
Can be projected over multiple years as part
of a strategic plan to include implementation
of strategic initiatives
Operating Budget - Revenues
Associate fixed costs with reliable revenue
 Contractual income, income from term investments,
committed grants, committed donations
 Fundraising events, applied for but unconfirmed
grants = NOT reliable
 Ensure your committed revenues cover your fixed
costs
 Fixed (indirect) costs = rent, payroll, telephone &
technology – anything you spend regardless of
whether a program runs this year or not
FIXED = The cost to keep your doors open! If your
reliable revenue doesn’t cover your fixed costs – you
could find yourself in financial difficulties.
Exercise – take away
Take your organization’s operational
budget and try to split the costs between
direct and indirect.
Then, take the indirect costs and calculate
the % of indirect costs / reliable income.
This percentage will help guide you as you
grow your reliable income stream and
when you are applying for funding.
Exercise – take away i.e.
Organization A:
Reliable funding of $2 million per year
Indirect costs of $500K per year
Percentage 25%
This is the percentage you could include in
grant applications
Budget components – ideas
 Supporting
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Year over year staffing history
Year over year income history
 Fixed
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(indirect) vs. Variable (direct)
Fundraising events, plans, history
 realistic,
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analyses:
& conservative
Ongoing commitments (rent)
 mid-budget
year increases, moves etc.
Direct / Indirect Costs
Direct Costs
 Direct costs relate to a specific project or program.
Indirect Costs or Overhead
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Indirect costs (sometimes called Overhead or General
Administration) do not relate solely and specifically to a
particular project or program, but are necessary to its
completion.
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A formal indirect cost rate can be calculated and negotiated
for some grant proposal budgets when allowed by the funder.
Overhead is a vital budget component for all projects, whether
specifically funded or not, and should certainly be taken into
account along with direct costs as funding request budgets are
composed.
Indirect Costs
Question to ask – does the expense stop if the
program stops?
 Some costs are allocated across programs,
but overall are still indirect – would you lay off
the ED if a program was cancelled – likely not
- this is an indirect cost.
 Rent – same premise – would you be able to
lease less space if a program were cancelled
– NO – indirect cost.
Capital Budget
Associated with Statement of Financial Position
(Balance Sheet)
 Planning for optimal cash position (operating
& emergency reserves, other strategic
reserves)
 Planning for capital investments (equipment
upgrade/replacement, facilities acquisition
and/or maintenance, special projects, etc.
over a longer time period)
 Planning for long term endowment (if
appropriate)
Non-profit – a misnomer!
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Nonprofits are in fact businesses whose profits
(surpluses) remain with the (non-profit) corporation
rather than going to individuals or shareholders as in
the for-profit business model
"not-for-profit" does not mean "no surplus allowed"
Nonprofits need operating reserves. Operating reserves
or working capital funds create liquidity and financial
flexibility for the organization. Organizations with a
strong working capital position can focus beyond
day-to-day cash flow needs and more effectively
plan for the long-term health of the organization.
Capital Budget – Operating
Reserve Funds
Organization can be thrown into cash flow stress
Become distracted from good long-term decisionmaking or forced to make expensive short-term
crisis-based decisions
May not have the resources to continue delivery of
its programs
Organizations with limited or negative working
capital by necessity focus on the short term and
are less likely to engage in responsible long-term
planning.
Building operating reserves is a top priority.
Example – Internal Restrictions/
Contingency Funds
 Removes
“operating surplus” excesses
 Rainy day source of operational funding
OR savings for planned expenditures
COMMON names:
Building R&M Fund
Capital Purchases Fund
Operating contingency Fund
Operating Reserves – Plan
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Set a target each year – much like a Strata
Plan does – i.e. 1% of reliable revenues
Make the building of a long-term reserve just
as much of a priority as the short-term funding
of your project(s)
Build the “expense” of the reserve into your
operating budget – bottom line
Create recurring board motion to approve
funds - $ doesn’t need to physically move –
operating reserve is an appropriation of
surplus
Project / Department Budgets
It’s important to understand that often staff
preparing and managing these may not
have a strength in this area – often this
results in these budgets being prepared
quickly, without care and lacking the
back-up information to support the
assumptions underlying the numbers.
Project / Departmental Budgets
Support from bookkeeper/controller is
essential
Review by bookkeeper/controller is
essential
Consistency between departments (format)
Consistency of reporting (to finance dept)
Accountability is KEY
Project / Department Budgets
 Detailed
 Realistic
 Manageable
 Based
on past results and current
strategic initiatives
 Beware optimism – reliable funding
 Embrace caution – variable funding
 Team approach – ED, project team,
finance
Project / Dept Budgets
 Must
“feed into” operational budget
 Timing – incorporate into annual budget
planning process
 Staff preparing need to be fed certain
pieces of information – such as salary
allocation of staffing – they should NOT be
provided with detailed staffing
information
Project / Dept Budgets
 Based
on realistic income – prove income
estimates in budget document – scan
supporting information and include in
presentation to controller & ED
 Research expenses under your control
 Get estimates of expenses from controller
for other items you do not control i.e.
Overhead allocation, staffing
Budgets for Grant Applications
Most grant-makers will request both a general
operating budget and special project budget
(if applicable).
Budgets are cost projections. They are also
show the funder how your project will be
implemented and managed.
Good budgets reflect carefully planned
projects.
Budgets for Grant Applications
 Include
your organization’s YE financial
statement
 Include specific notes and explanations,
just as you would if explaining to your
finance committee or board
 Include direct costs / overhead
Review of Budget Results
 Controller
to ED and Treasurer – detailed
results
 Finance Committee Distribution – detailed
results
 Feedback – all above involved
 Board of Directors Distribution – summary
results
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Treasurer presents results
Finance Committee and key staff support
Review of Budget Results
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High dependence on non guaranteed income
sources (fundraising, grants)
Significant, unexplained changes in expenses –
particularly large % expenses.
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I.e. Don’t focus on a $200 change in a $1,000
account – focus on a $20,000 change in a
$100,000 account – both are 20% - so think before
you spend time on immaterial items.
Significant, unexplained changes in revenues
Mission drift – too many new programs – loss of
core programs and other issues
Year upon year of deficits – it’s not a bad thing to
be a non-profit with a profit!
Review of Budget Results
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Line of Credit balance
Unsecured debt
Un-secured investments (stocks, bonds)
Related party amounts (to/from employees or
related orgs)
Capital Asset balances – are they relatively current
– I.e. Is a write-down in value warranted?
Inventory – was a count performed – by whom
and when?
External and Internal Restrictions
Review of Budget Results
TIMING:
 Budget to actual results – quarterly is a
good habit, monthly is too often UNLESS
you are in a period of financial
uncertainty
 Delays in reporting may indicate lack of
experience in finance department – this is
an important area of continuing
education for staff (as well as board)
Vocabulary
Assets, in general, are possessions having value. In
accounting, assets are resources owned, or in some cases
controlled, by an individual or organization as a result of
transactions or events from which future economic benefits
are expected to flow to that individual or organization.
Contributions are non-reciprocal transfers to a not-for-profit
organization of cash or other assets or non-reciprocal
settlements or cancellations of its liabilities. Government
funding, grants and donations provided to a not-for-profit
organization are considered to be a contributions.
Current assets are those assets that are in the form of cash, or
expected to become cash within the coming year.
Current liabilities are those obligations that have to be paid
within the coming year.
Vocabulary
Net assets, sometimes referred to as equity or fund
balances, is the residual interest in a not for-profit
organization’s assets after deducting its liabilities.
Net assets may include specific categories of
items whose use may be either restricted or
unrestricted.
Restrictions are stipulations imposed that specify how
resources must be used. External restrictions are
imposed from outside the organization, usually by
the contributor of the resources. Internal
restrictions are imposed in a formal manner by the
organization itself, usually by resolution of the
board of directors.
Vocabulary
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Fixed costs are not ordinarily affected by the number of
projects, programs, plays, workshops, or classes given or
clients served. Examples of fixed costs: permanent fulltime
staff, office rent, principal & interest payments on a longterm loan.
Variable costs are usually project-oriented and are more
controllable or adjustable. Examples: number of
characters in a play, number of participants served by a
program, number of weeks a program runs, number of
exhibitions or concerts, local or international, additional
space rental requirements, etc.
Semi-variable costs are in between - these must happen
but can be mitigated somewhat. Examples: choosing
color vs. black & white for a print job, bulk ordering of
necessary items, short-term rental vs. purchase of
equipment, engaging part-time temporary help rather than
hiring fulltime permanent staff, etc.
Vocabulary
Non-cash Budget Items
 Depreciation is a way to spread the expense of a
large capital purchase over the number of years it
will be in use
 In-Kind Contributions In-kind contributions are
net-zero. That is, the contribution and the expense
are equal, so they do not affect the bottom line net
income, but they do increase the magnitude of the
income and expenses. When budgeting for in-kind
contributions, it is extremely important to ensure that
the in-kind expenses are budgeted as well as the
income. It would not be a good thing to balance a
budget with non-cash income covering cash
expenses.
Thank you!
 Check
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out my website:
www.susanlucato.com for resources and
copies of today’s presentation
Articles of Interest
www.bdo.ca/en/Library/Industries/not-for-profit/pages/UnderControl-Proper-Financial-Controls-Can-Protect-YourNonprofit.aspx
Under Control: Proper Financial Controls Can Protect Your Nonprofit
www.cica.ca
Various publications for the non-profit sector – free downloads Publications tab
www.nonprofitaccountingbasics.org
Various publications, articles and advice on running the financial
side or your non-profit organization
Sources & Resources
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Non-profit Accounting Basics
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www.nonprofitaccountingbasics.org
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Canada Revenue Agency
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Volunteer Victoria
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www.cra-arc.gc.ca
www.volunteervictoria.bc.ca
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Charity Village
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Imagine Canada
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www.charityvillage.com
www.imaginecanada.ca
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Office of the Information and Privacy Commissioner for BC
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BC Societies Act
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www.oipc.bc.ca
www.bclaws.ca/EPLibraries/bclaws_new/document/ID/freeside/00_96433_01