Accurate and well-managed finances are the foundation of successful stewardship for nonprofits. Creating a budget and managing it effectively is the cornerstone of long-term financial stability and growth for any organization, especially those operating with thin margins or that rely on grants and donations to support their mission. These are some of the reasons why budgeting with intention is so critical for nonprofits.
One question that comes up often from our nonprofit accounting clients is whether they should be budgeting on an annual or monthly basis. . We firmly believe that there is only one right answer to this question. All nonprofit organizations need an annual budget. However, if you don’t break your revenue and expenses into a monthly budget format, you are doing your organization, your board and yourself a disservice.
Think about this analogy: How do you prefer to get to Miami from Washington, D.C.? Driving the 16 hours is akin to an annual budget while flying is the monthly budget option. PLEASE take the most efficient and best option.
Our advice is that nonprofits should create and adhere to a monthly budget because it is the only way to have clarity on your cash flow throughout the year, control over your inflows and outflows, helpful analysis of interim operating results, and the real-time insights you need for better decision-making and discussions with your board.
It can be challenging for nonprofit leaders and board members to have the discipline and the willingness to prepare a budget month by month, much less adhere to it. If this is the case for your organization, consider these benefits of monthly vs. annual budgeting for nonprofits:
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- A monthly budget provides a more accurate projection of the timing of your nonprofit’s expenses, income, and cash flows. It makes it much easier to set financial goals and achieve them.
- A monthly budget report gives you clearer and more accurate information to help you build a strong financial foundation.
- A monthly budget helps you compare interim actual performance to budget on a monthly basis. This gives you more timely and accurate information from which to make strategic decisions or change course prior to year-end based on interim results.
- A monthly budget is the best way to report to your board and management. Most organizations that have an annual budget report monthly actual results against an annual budget.As an example, five months into the year, those organizations with only annual budgets are asking their leadership to figure out how the reported expenses compare to 5/12ths of the year.I’m an accountant and I don’t even like math. If you provide your leadership with YTD actuals for 5 months, versus a monthly budget for 5 months, you are getting information that is easy to understand and helpful for analysis and decision-making.
- You will have an accurate analysis of your monthly donor membership income from which to base your spending decisions and cash flow needs.
- A monthly budget better defines short and long-term financial goals. An important part, and often the very point, of a budget is to help your non-profit achieve its goals. Monthly budgeting allows you to see and report to your board where you are in relation to meeting your goals in a timely manner.
Each dollar and line item in your nonprofit budget represents an opportunity for your organization. You need to take the care and management of these opportunities and align them with your goals and objectives when determining how to manage and leverage them.
Developing a monthly budget detailing each expense, hard and fixed costs, plus your inflows and outflows of cash will help you take an honest look at how much in additional funding you need to source, or where you can reduce overhead and outside costs.
One last tip: Ensure that you’ve reviewed the budget inside and out before presenting it for approval. Once it’s been approved, assign the appropriate personnel to manage implementation and monitor ongoing budget issues each month for the year.
The next step? Take control of your non-profit budget!
- Download The Non-Profit Budget Checklist here.
- Schedule a complimentary consultation with the Consultance Accounting Non-Profit Team for clarity and confidence this budget season and beyond.
Consultance Accounting is your non-profit accounting partner. We’ll help you simplify and streamline your non-profit financial management, including the not-for-profit budgeting process from an annual chore to a monthly strategic planning tool.
We look forward to partnering with you!