1. B ASICS OF B UDGETING AND E XPENSE M ANAGEMENT February 2, 2010

2. Q UESTIONS TO THINK ABOUT What is a budget? What is the budgeting process? What are the components of a budget? What types of budgeting will a nonprofit use?

3. Q UESTIONS AND R EVIEW OF L AST W EEK Chart – Nonprofit Giving

4. R EVIEW

5. O VERVIEW OF F INANCIAL M ANAGEMENT Plan Implement Control Measure Results Report

6. P LANNING Mission, vision & values Goals and objectives (organizational and program) Funding goals & objectives Prospective funding sources Action plan

7. R ESPONSIBILITY C ENTERS DESIGNATED AT THE PROGRAM LEVEL Expense Centers: programs are responsible for managing expenses within confines of program. Designates program managers as day-to-day budget managers. Revenue Centers: generate revenue to cover expenses. May be responsible for some expenses outside program. Profit Centers: financially accountable for generating revenues in excess of expenses. Investment Centers: manage endowments, investments and other assets. *can be combinations

8. B UDGETING Financial Management Basics & Budget Components

9. C OMPONENTS OF A B UDGET Revenues Donations – restricted and unrestricted Special Events Grants and Contracts Membership Dues Third-party payments Program income Investment income Miscellaneous – unrelated business income

10. C OMPONENTS OF A B UDGET Expenditures Salaries and wages Employee related expenses (ERE) Contractors Rent Utilities Supplies Technology (phone, internet, cable) Equipment Postage and shipping Printing and publications Travel Conference Miscellaneous

11. C OST C ONSIDERATIONS Fixed Costs Variable Costs

12. S TEPS TO B UDGET DEVELOPMENT Prioritize and determine the need at program or activity level List all possible revenues and expenditures Variable Fixed Separate actual from projected Compare income to expenses and make adjustments where necessary Budget approval process and adjustments

13. I MPLEMENTATION - T YPES OF B UDGETS Line-Item Budgeting Performance Budgeting Program Budgeting

14. L INE I TEM B UDGETING Most common Can be prepared on organizational and program level Purpose is financial control Approved prior to the beginning of the fiscal year Ideally balanced, often not balanced

15. L INE I TEM EXAMPLE – O VERVIEW 2011 Mentoring Program Budget Revenues Donations55,000 Special Events30,000 Grants140,000 TOTAL REVENUES$225,000 Expenses Salaries160,000 Office28,000 Other37,000 TOTAL EXPENSES$225,000

16. L INE I TEM EXAMPLE – REVENUE DETAIL 2011 Mentoring Program Budget Revenues Donations55,000 Special Events Bowl-a-Thon10,000 CEO Breakfast20,000 Grants US DOE100,000 Mentoring Foundation40,000 TOTAL REVENUES$225,000

17. L INE I TEM EXAMPLE – EXPENSE DETAIL Expenses Salaries & Payroll160,000 Rent24,000 Technology2,800 Supplies1,200 Travel and Conferences10,000 Marketing19,000 Misc. (Event Expenses)8,000 TOTAL EXPENSES$225,000

18. L INE -I TEM B UDGETS Simplicity Easy to see and understand the source and amount of revenues, how the funds will be used, balance No information about the amount or cost of services Is not tied to outcomes Allocation decisions are tied only to line- items AdvantagesDisadvantages

19. P ERFORMANCE B UDGETING Must be done at program level Purpose is to relate expenses to programs by determining Program output performance measure Total program cost Cost per unit of service o Provides data on productivity

20. P ERFORMANCE B UDGETING Cost per Output Total Program Cost / Outputs = Cost per Unit Mentoring Program/# Mentored $225,000 ÷ 250 mentored = $900 per mentee Other measures: hours of service, meals, clients, etc.

21. P ERFORMANCE BUDGETING Provide information on the amount of service and attendant costs including costs per unit/output Raise the level of debate beyond line items to programs, services, costs and efficiencies Organization must employ sophisticated cost analysis techniques that are often beyond the capacity of leadership AdvantagesDisadvantages

22. P ROGRAM BUDGETING Similar the performance budget in that it takes place at the program level Format is similar to performance budget Focus is on outcome performance, not outputs or units of service

23. P ROGRAM BUDGETING Provide information on the amount of client outcomes achieved by program with attendant costs Raise the level of debate from service and efficiency concerns to client and effectiveness concerns Good outcome performance measures are hard to develop Many do not have generally accepted outcome measures AdvantagesDisadvantages

24. P ROGRAM B UDGETING Cost per Outcome Total Program Cost / Outcome= Cost per Unit Mentoring Program/# Graduate from HS $225,000 ÷ 88 graduates = $2557

25. A PPROACHES TO B UDGETING Centralized (Top-Down) Model Decentralized (Bottom-Up) Model GAAP

26. W HEN BUDGETS DON ’ T BALANCE … What do we do??? Revenues Expenses

27. C ASH AND A CCRUAL A CCOUNTING Cash: recognizes revenue when it is received in cash and expenses when paid in cash Accrual: recognizes revenue when it is promised/pledged and expenses when resources are used.

28. W HICH IS BETTER ? CASH Plans for inflows and outflows of funding Considers cash on hand Often used in smaller organizations and can be manipulated ACCRUAL Matches revenue with resources Can be a more reliable form of determining profitability (more difficult to manipulate)

29. C APITAL BUDGETS For acquisition of high-value assets Entire value of asset is not shown in a single year’s budget, but is capitalized over the life of the asset Accrual expenses reflect the actual use of resources

30. B UDGETING F ORMATS Functional: focus on major areas of function. Easily understood by laypeople. Flexible: considers expected revenues and expenses and can help work through scenarios. Key – fixed and variable costs. Responsibility Center: aka program/division budgets

31. O THER C ONSIDERATIONS Cost Benefit Analyses Forecasting methods: historical, modeling Forecasting factors: economy, political climate, trends

32. REVIEW What is a budget? Why would an organization chose a decentralized process? What are the components of a budget? Why is forecasting important?