Board Governance: Why is effective budgeting important?

budgeting for not for profit organizations cpa

Organizations achieve its mission through executing a strategic plan. However, strategic plans tend to look forward three to five years, which can make it difficult to determine what activities should be undertaken today. A budget is used to break down the organization’s planned activities into smaller, more manageable pieces.

Budgets are a “best guess” plan based on what you know right now and typically prepared on an annual basis. In building the budget, most organizations use the previous year as a starting point and revise figures as needed. Gathering information from everyone who is using the budget can ensure that it is as accurate as possible.

Tips for budgeting:

  • May be prepared for operations, capital investments or a special project.
  • Be realistic. If it is unachievable on day one, it is likely to be ignored and lose its value as a planning and monitoring tool.
  • Do not change it once it has been approved. Generally, the budget will be different from actual results at the end of the year.
  • Document the budget and its assumptions in writing.
  • Prepare it in the same format and accounting basis used to report actual results. This ensures that there are no surprises when the annual financial statements are prepared.
  • Compare the budget to actual results throughout the year and explain the differences. The differences may indicate that you need to take action based on current circumstances.

The advantages of an effective budgeting process:

  • You can measure the resources available, and if there are not enough resources to complete all the activities, you can prioritize and decide which activities will move forward this year.
  • Ensures that the board of directors, management, staff and volunteers are focused on the same priorities.
  • Comparing actual results to the budget will indicate the accuracy of your budgeting and highlight what is changing in the organization.  This analysis can inform next year’s budgeting and strategic planning process.
  • Completing your budgeted activities, takes you one step closer to achieving your strategic plans and organizational mission!

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