By Gillian Gorra, BDO FMA (formerly Financial Management Associates)
and Vickie Lakes-Battle, IFF
Nonprofit success is heavily tied to two things – mission, and money.
We all know there’s no shortage of noble missions out there. When it comes to “money,” many nonprofit leaders focus their efforts on fundraising, but financial planning, modeling, and monitoring is just as important to financial health.
Most small nonprofits don’t have the benefit of an on-staff CPA or CFO, and, without formal training in finance, financial management might seem scary. But it doesn’t have to be – in part because you don’t have to do it alone.
In fact, team-based financial management is the best approach to creating an effective budget that aligns with your organization’s values and mission goals. After all, your mission and your money are very much interconnected. That team is broader than a lot of people think – it’s not limited to just executives, fundraisers, and financial-types. Your budget plans for all departments and programs, so your budgeting team should also include all departments and programs.
Program staff know best what’s been missing, what’s been underutilized, and what things really cost to run their programs. HR staff understand the true costs of turnover, new hires, benefit changes, and salary increases. And involving Board members early on helps inform goals for the next year and avoid any unexpected questions at the end of the process.
IFF and our long-time partners at BDO FMA (formerly Financial Management Associates) have partnered with hundreds of nonprofits as they develop annual budgets using this team-based approach. Not only does this approach create ownership and ensure the optimal use of resources towards your mission service, it also enhances your team’s ability to communicate your organization’s financial story to board, funders, and other key stakeholders. Here’s what one nonprofit leader had to say about it:
“Before, we were coming up with the budget within the finance department and then funneling it down to the program level,” said Christa Hamilton, Executive Director of the Centers for New Horizons. “After working with our FMA coach, we start at the program level and feed that up into the budget. We sit with the program directors and hammer out the changing needs of the organization — for example, maybe we’re serving a new population and need an additional employment specialist. The team loves it.”
Your team can love the team-based approach, too. Working together, here are 10 steps to your budgeting process:
1. Create a calendar.
Beginning from when the Board of Directors needs to approve the final budget, work backwards to set internal deadlines for preliminary drafts. Typically, the process will take 5-6 months.
2. Confirm your goals.
This means both financial goals as well as programmatic goals — and your team approach will really help work through both. Some questions to discuss can include:
- Are the goals clear and understood by everyone on the team?
- Are the financial and programmatic goals aligned?
- Will you budget a surplus, a deficit or to break even?
- Can you build a plan to grow reserves?
- What do these goals look like on a calendar? What are the check points?
3. Provide data.
It is important the full team has access to both past financial reports and year-end projections as a reference point for planning.
4. Pick a template.
For consistency and to minimize confusion, the team leader should distribute the template they’d like each member to use to build their budgets, providing a roadmap to input anticipated revenues and expenses. Click here to download a template sample to get started.
5. Draft the budget.
Equipped with organizational goals, financial data, and a uniform template, the team can now build their department budgets. Finance leads should work with team members to project monthly cash-ins and outs to ensure there is enough cash on-hand throughout the year.
6. Identify gaps and negotiate solutions.
Once the department budgets are put together, it is common for there to be budget gaps or cash flow shortages that need to be addressed. Be sure to build in adequate time for the financial lead to meet up with team members to work on appropriate adjustments.
7. Check for your values.
- Once the first draft is completed, assess whether the budget meets the organization’s goals and values. Some key questions might include:
- Does your planned compensation reflect your commitment to equity?
- Do your budget projections support the current year’s goals of a longer-term strategic plan?
8. Create contingency plans.
Even the best-laid plans go awry due to unforeseen circumstances like COVID-19, especially for higher-risk revenues and expenses. Your contingency plans should answer the following questions:
- What might happen?
- What will we do if it happens?
- How will we communicate changes to stakeholders?
In order to support nonprofit organizations navigating unexpected financial troubles due to the COVID-19 pandemic and potentially offset closures, IFF has curated a list of resources from government and philanthropy to help organizations in the Midwest.
9. Present the budget to your Board.
It is important to be thorough and transparent in your presentation, including all assumptions, risks, and opportunities behind the budget. Be sure to also leave enough time for questions, concerns, and feedback from your Board members.
10. Debrief.
Budget planning is a long process. Check in with your team on what went well and what they’d like to improve for next year’s budget processing—which could be as soon as six months away!
So, there you have it — 10 steps to creating your annual budget as a team. Nonprofits that use this process find that working as a team keeps everyone focused on their goals and thinking creatively about how to solve challenges together.
If you’d like to learn more about how IFF provides affordable loans, real estate tools, and capacity-building programs, click here, call 866.629.0060, or email general@iff.org for more information.