Budget-Building Book for Nonprofits

THE AUTHORSMURRAY DROPKIN is president of CMS Systems, Inc., a consulting firm that specializes in improving the financial operations of nonprofit and for-profit organizations. He is the coauthor of Bookkeeping for Nonprofits and The Cash Flow Management Book for Nonprofits. JIM HALPIN has written articles for technical publications and has developed accounting software and other applications for clients in a wide variety of industries. He is the coauthor of Bookkeeping for Nonprofits and the coauthor, with Dropkin, of the newsletter Nonprofit Report. BILL LA TOUCHE used his writing, planning, training and organizing skills to help a wide range of individuals, groups, and organizations get what they want from complex business, governmental, and nonprofit entities.

• Preface xixAcknowledgments to the First Edition xxiiiAcknowledgments to the Second Edition xxvThe Authors xxviiIntroduction: How to Use This Book xxixPart One Understanding Budgeting Basics 11 Why Budgets and Budgeting Are Important to Nonprofits 3A The Importance of Budgets and Budgeting 4B The Basic Characteristics of Budgeting 52 Understanding Basic Types of Nonprofit Budgets: Overview 6A Organization-Wide Operating Budgets 6B Operating Budgets for Individual Programs, Units, or Activities 7C Capital Budgets 8D Cash Flow Budgets (Cash Flow Forecasts) 8E Opportunity Budgets 9F Zero-Based Budgets 103 Key Board and Staff Roles and Responsibilities in Nonprofit Budgeting 12A The Board’s Role 12B Executive Director’s, President’s, or CEO’s Role 14C Chief Financial Officer’s Role 14D Program, Unit, or Activity Manager’s Role 15E Department Manager’s Role 16F Other Possible Participants 164 Establishing Budget Guidelines, Priorities, and Goals 17A Establishing Guidelines 17B Identifying Priorities 18C Setting Organization-Wide Goals 18D Setting Individual Program and Unit Goals 205 How Different Sources and Types of Income Can Affect Budgeting 21A Unrestricted Funds 21B Contract or Grant Agreement Funds 21C Restricted Contributions 22D Income from Trade or Business Activities 22E Asset-Generated Income 23F Cash and Noncash Contributions, Including Pledges 23G Funds Requiring a Cash or In-Kind Match 236 Strategies for Developing Organization-Wide Operating Budgets 25A Strategy 1: Set Annual Organization Outcome Goals from the Top Down 26B Strategy 2: Set Annual Income and Expense Targets from the Top Down 28C Strategy 3: Request Draft Budgets That Show Priorities from Program or Unit Heads 28D Strategy 4: Use Zero-Based Budgeting 301 Possible Problems with ZBB 312 Benefits of ZBB 31Part Two Step-By-Step Budgeting Guidelines 337 Start with the Budget-Building Checklist 358 Designing Your Budgeting Policies and Procedures 38A Basic Budgeting Policies and Procedures 38B Basic Income Projection Policies and Procedures 38C Basic Expense Projection Policies and Procedures 39D Basic Cash Flow Projection Policies and Procedures 40E Policies Establishing the Fiscal Year 40F Other Needed Policies and Procedures 40G Checklist for Information to Include in Written Policies 41H Final Review and Integration 429 Creating Your Budgeting Calendar 43A Five Steps for Developing the Budgeting Calendar 43B Instructions for Creating an Annual Budgeting Calendar 4510 Orienting Program and Department Managers and Staff to Budgeting 48A Budget Team Meeting 48B Practical Considerations When Planning Budget Team Meetings 4911 Contents of the Annual Budget Preparation Package 5112 Developing Organization-Wide Operating Budgets 55A Five Steps to Prepare for the Annual Budgeting Process 55B Five Steps to Create Annual Budgets 5613 Developing Operating Budgets for Individual Programs, Units, or Activities 58A Planning for Program or Unit Budget Development 58B Basic Steps in Creating a Program or Unit Budget 60C Setting Two Kinds of Program or Unit Goals 60D Preparing a Program or Unit Workplan 61E Identifying the People and Things Needed to Implement a Workplan 62F Identifying Personnel Costs 63G Identifying “Other Than Personnel” Cost Categories 64H Identifying Specific Line-Item Costs 65I Providing Budget Justification or Cost Documentation 65J Matching and In-Kind Contributions 66K Distributing Copies of Final Program or Unit Budgets 6614 Major Components of Operating Budgets 68A Projected Income 68B Projected Expense Categories and Subcategories 68C Projected Expenses by Line Item 69D Budget Narrative or Justification 6915 Estimating Income and Expenses 70A Estimating Future Income 701 Making Needed Annual Policy Decisions 702 Projecting Various Kinds of Income 74B Estimating Expenses 751 Annual Policy Decisions 752 Projecting Salaries and Wages 753 Projecting Fringe Benefits 764 Projecting Other Operating Costs 77C Summarizing Proposed Changes in Draft Budgets 78D Budget Highlights 7916 Allocating Administrative, Overhead, and Shared Costs 81A Allocation Methods 82B Worksheet for Allocating Costs 8317 Revising Draft Operating Budgets 86A Updating Fiscal Projections 86B Trimming Draft Budgets 87C When More and Deeper Cuts Are Needed 88D Avoiding Potential Budget-Cutting Problems 8918 Zero-Based Budgeting (ZBB) 90A Overview 91B Five Basic Questions 92C Information Provided by the Program 93D Potential Demand 94E Break-Even Analysis 94F Decision Time 96G Getting Started with ZBB 9719 Capital Budgeting 98A Strategic Fit 99B Viability 100C Return on Investment 100D Financing 1011 Mortgages and Loans 1022 Lines of Credit 1033 Leases 1034 A Note on Bond Financing 104E Two Types of Capital Projects 104F Cash Flow Budgeting or Forecasting 106G Final Considerations 10620 Presenting Your Annual Budget Proposal to the Board 107A Letter of Transmittal 107B Total, Organization-Wide Budget Summary 109C Program, Unit, or Activity Budget Summaries 109D Detailed, Organization-Wide, Line-Item Expense Budget 109E Individual Program or Unit Budgets 112F Other Useful Information 11221 Board Review, Revision, and Approval of the Final Budget 11322 Cash Flow Reporting, Forecasting, and Management 117A Fundamentals of Cash Flow Forecasting 118B Cash-Basis Accounting for Cash Inflows 118C Cash-Basis Accounting for Cash Outflows 119D Cash Flow Forecasting Based on the Operating Budget 1201 Reviewing the Operating Budget 1202 Adjusting the Operating Budget to Create the Cash Flow Forecast 121E Reviewing and Approving the Cash Flow Forecast 122F Short-Term Cash Flow Forecasting 122G Periodically Reviewing the Cash Flow Forecast 123H Corrective Actions for Forecast Cash Shortages 124I Cash Flow Reporting, Monitoring, and Analysis 12523 Monitoring and Modifying Approved Budgets 127A Regular, Timely Financial Reporting and Monitoring 127B Planning and Taking Corrective Action 128C Modifying Budgets 1281 Reasons for Modifying an Approved Budget 1292 Creating Written Budget Modification Policies and Procedures 129D Cash Flow Projections and Planning 1311 Causes of Cash Flow Problems 1312 Using Monthly Projections for Planning 1323 Addressing Cash Shortfalls 1334 Some Possible Drawbacks 13324 Conclusion 134Part Three Practical Budgeting Resources 137Resource A: Master Worksheet for Creating a Program or Unit Workplan 139Resource B:Worksheets with Sample Budget Formats 144Resource C: Examples of Financial Reports for Analyzing and Monitoring Income and Expenses 154Resource D: Tools for Analyzing Financial Reports and Planning Corrective Action 166Resource E: Example of a Detailed Organization-Wide Expense Budget 177Resource F: Additional Useful Checklists and Examples 188Resource G: Tools on the Accompanying CD 195How to Use the CD 199