Budget brilliantly for a brighter 2017
An important tool in the financial management toolkit for not-for-profits (NFPs) is budgeting. As well as tracking financial performance, a NFP’s budget can be used to anticipate cash shortages, illustrate to funders its long-term sustainability, and help plan for future growth and expenditure. If you are preparing a budget for the upcoming financial year, here are five tips to help you prepare an accurate and reliable budget:
1. Match the budget to your chart of accounts
Your accounting system’s chart of accounts should match your budget. If your organisation has multiple segments or cost centres, consider preparing separate budgets that feed into an overall budget. Both MYOB and Xero have budget reporting functions, which allow for comparing actual results against budgeted within your accounting system.
2. Keep notes and document your assumptions
All budgets are prepared using a variety of assumptions. It is important that these assumptions are thoroughly documented and evaluated regularly. Having access to these notes will help you to understand the reasons for any budget variance, and allow you to assess the accuracy of the original assumptions.
3. Use your funding documents
If your organisation receives grants or government contracts that are paid in instalments, reviewing your funding agreements will help predict the amount and timing of future funding. This will add certainty to your revenue projections.
4. Remember: Cash is king
Many NFPs find it sufficient to prepare a simple budget based off their statement of financial performance. However, it is important to consider your working capital and cash flow as well. Projecting your bank balance throughout the year is a good place to start, as even a simple cash projection based off expected income and expenditure can identify cash flow issues before they arise. Cash flow projections draw attention to the important aspects of managing working capital, such as collecting debtors, timing of GST obligations and the purchase of new assets.
5. Be realistic
It is important that the budget represents a realistic projection of the upcoming year. Too often, budgets can be subject to optimistic projections and assumptions. Be pragmatic when preparing your budget, as assuming the best-case scenario can lead to frustration down the road.
For assistance with preparing a budget tailored to your NFP, please contact your local BDO adviser.