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The Importance of Budgeting

By Greg Heitkamp, CPA – Senior Accountant

Management team members of not-for-profit organizations are frequently asked questions such as the following: Are we meeting our budget? Do we have enough cash? What is the budget for this project?

These questions are posed by employees determining their individual spending limits, board members examining the organization’s progress, or members of management reviewing the internal financial statements in an attempt to answer all of the other questions related to budgeting and the organization’s financial well-being.

The ability to budget effectively is crucial to maintaining a successful nonprofit organization. An effective budget should accomplish the following:

  • Ensure that the organization has appropriate staffing.
  • Provide a framework for decision making. An effective budget assists managers in choosing between multiple projects. Management should be allocating funds and resources to the projects highlighted in the budget(s).
  • Inform the staff and the board what the financial goals are for the year ahead. Budgets are excellent communication tools.
  • Monitor the financial activity of the organization. On a monthly or quarterly basis management should compare actual income and expenses to their budgets to ensure that spending is in line with revenues. If expenses exceed revenues then steps can be taken to prevent financial losses including reduced spending. If income exceeds expenses then management can determine an appropriate use for the excess funds, such as investing the funds or making additional capital expenditures.
  • Identify fraud by determining unusual gaps between planned spending and actual expenses.
  • Assist the organization’s plan for capital expenditure projects. A comprehensive budget will set the organization’s financial goals for the year in order to fund designated projects.

Management and the board of directors should carefully prepare and track budgets to ensure that the organization is staying on track with its mission and vision.

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