Budgets
Amita Patel Greer
Director of Business Advising & SBDC
Montana CDC
229 E. Main St.
Missoula, MT 59802
406.728.9234 ext 214
406.542.6671 fax
www.mtcdc.org
OUR MISSION
We provide financing and
consulting services that
transform the lives of
individuals and strengthen
community prosperity.
What do we do?
• Small business
loans
• Consulting
Rachel Edington—Gluten Free Mama, Polson, Montana
SMALL BUSINESS LOANS
• Nearly bankable
businesses
• Term loans
• Lines of credit
• $1,000 – $1,000,000
• Start-ups
• Existing businesses
• 1% - 2% higher than
banks
Nova Café—Serena Rundberg, Bozeman, Montana
CONSULTING
• FREE
• Business plans
• Cash flow projections
• Government contracting
• Education and training
• Business idea evaluation
Tri-State Restaurant Supply—Jim Bliss and Shelly Smith,
Kalispell, Montana
INTRODUCTIONS: WHO,
WHAT, WHY?
Financial Statements
Financial Statements
Growth is good…right?
“Grow or die”
or “Growth is always good”
or “Bigger is Better”
Grow…But Only If It’s
• A Well-Thought-Out Decision
• Managed, Efficient Growth
What’s a Budget?
A Budget is a…
Breakdown of
a spending
plan……it
must be
realistic,
accurate and
controlled
A Budget is a…
Summary of short-term
operational activities of a
organization (usually 1 year)
Budgets are about numbers
Why do we need one?
Everyone in the
organization
needs to
understand the
budget, because
to understand
the budget is to
understand the
goals of the
organization
Budget = Planning Tool
Ex. A nonprofit makes up its initial
budget. It looks good and there may even be
a surplus at the end of the year. It’s
finalized by the board.
However, budget isn’t reviewed again until
two months before year’s end. During the
year, no one enforces any controls. When
the budget is finally reviewed, several
expenses in more than one department are
over budget and revenue is under budget.
Step 1: Prepare a
Revenue Budget
Set up two revenue budgets:
The “Known” Budget AND “What If”
Budget
Step 2: Prepare an
Expenditure Budget
Always include a “contingency” line item
for emergency or unexpected expenses
“Known” Budget and a “What if” Budget
Plan for emergencies, additional expenses
Break down expenditures into Fixed and
Variable expenses
Step 3: Prepare an
Overall Budget
Be sure all departments review your initial
budget
Then prepare the overall budget
This summarizes the entire organization’s
revenues and expenditures
Step 4: Prepare a
Budget Report
A budget report compares actual to budgeted
amounts
You should prepare and analyze your budget
report every month in order to control your
budget effectively
Share Your Budget
Organization A: Before initial budget meeting, staff
from a variety of departments are chosen as budget
coordinators and then budget coordinators review the
revenue with these questions:
1.
2.
3.
4.
Will there be an increase or decrease in revenue?
If so, how much? How will it affect the
department’s operation?
Do we expect any unusual expenditures for the
year?
Any changes in personnel due to factors such as
retirement or maternity leave?
Any changes in tax rates, fringe benefits, rents,
etc.
Don’t Do This…
Organization B: Accounting department prepares the
budgets for all the departments. Once the budgets
are prepared, they are given to the department heads
with little or no input from the managers.
Departments are periodically told if they are within
budget. If a line item is over budget, department
does not feel responsible because of the lack of
input it had in its initial preparation.
This Is A MUST…
Management should review Budget on a
monthly basis
Board should receive a copy on a
monthly basis
Managers should meet with Finance on
a monthly basis to discuss financials
and any unbudgeted expenditures
Budget: Best Practices
•
•
•
•
•
•
•
Know your goals
Have “buy in” on your process
Involve staff at other levels
Budget capital expenditures
Budget a surplus
Project cash flow
Budget temporary and
permanently restricted revenue
Why Budget a Surplus?
•
•
Ensuring that your
organization can sustain
itself during an unexpected
change or difficult period
Work with management to
project a surplus; identify
other revenue sources
Project Cash Flow
•
Prepare a monthly cash flow
projection with your budget
•
Monitor and adjust monthly
•
Review with management and
board
Budget Temporarily &
Permanently Restricted Revenue
Why budget for these revenue sources
if they do not hit my Unrestricted
Column on my Statement of Activities?
• They will affect your final
organization surplus/deficit result
•
Provide revenue goals and results
for fundraising for future years
Top 5 Mistakes
1.
Budget is not contained in the accounting
system but maintained in Excel
spreadsheet
-Difficult to keep budget accounts
properly aligned with accounts in the
accounting system
-High potential for error due to the
manual work involved
Top 5 Mistakes
2. Budget is not seasonal
-Monthly budgets are often
created by dividing the annual
budget by twelve, rather than
taking into account seasonality
when doing monthly budgets
Top 5 Mistakes
3. Significant variances from budget
are not clearly identified
-some variances may be small and not
worthy of management’s attention
-larger variances (over 10%) need to
explained and justified
Top 5 Mistakes
4. Variance explanations do not properly
identify underlying cause of variance.
-Instead of saying “salaries are higher
than budget due to a higher number of
employees than planned”
-Say “salaries are higher than budget due
to hiring additional employees to meet
greater than expected demand for services”
Top 5 Mistakes
5. Budget Process is not clearly defined.
-There should be a financial policy that
specifies who is responsible for developing
the budget, who is responsible for
approving it, and the timeline for this to
occur
Case Study: Hull House
Founded by Nobel laureate Jane Addams in 1889 to help
Chicago’s immigrants build “responsible, self-sufficient
lives”
?
Case Study: Hull House
Founded by Nobel laureate Jane Addams in 1889 to help
Chicago’s immigrants build “responsible, self-sufficient
lives”
Provided foster-care services, job training, counseling
and literacy and education programs at more than 40 sites
throughout Chicago
On Jan. 27, 2012, Hull House closed
One blogger wrote: How could a board that included
prominent lawyers, management consultants, financial
advisers, and corporate executives have allowed a 120year-old community institution to collapse under its
watch?
Case Study: Hull House
Chairman of the Board blamed the economy. Increased demand
for social services but government agencies and
foundations reducing their support.
However, if you look at their financial statements, its
June 20, 2007 balance sheet showed that its unrestricted
net assets were negative $2.3 million
Hull House was millions in the red before recession even
began
Board Chairman said that financial reports prepared by
management had sugar-coated the situation and because
staff members maintained a positive attitude, board failed
to understand magnitude of financial problems
Case Study: Hull House
However, Wood, a former chief executive of Hull House who
retired in 2011 criticized the board for not understanding
the idea of “living on the edge”
Wood: “staff members like me were staying positive in
attitude [because] we are very used to social-service
agencies always being on the brink of destruction”
Both the board and the management staff failed to
recognize the crisis while there was still time to turn
things around
Case Study: Hull House
However, Wood, a former chief executive of Hull House who
retired in 2011 criticized the board for not understanding
the idea of “living on the edge”
Wood: “staff members like me were staying positive in
attitude [because] we are very used to social-service
agencies always being on the brink of destruction”
Both the board and the management staff failed to
recognize the crisis while there was still time to turn
things around
Common Mistakes
1. Using all cash first and then need
financing because the business ran out of
cash
2. Using short-term debt to finance long
term assets
3. Using credit cards--easy money but not
great if you can't pay it back right away
4. Getting more debt to plug in holes when
business model doesn't work
Snake Chart
Learn More
-Visit us online at
www.mtcdc.org
-Read our success
stories
Kalispell
10 Depot Park
Missoula
229 E. Main St.
Bozeman
222 E. Main St.
406.728.9234