Part five of a mini-series on nonprofit budgeting
Does your organization go on “high alert” when there’s a fear of being over budget? Or do the board and staff ignore the warning signs of potential challenges on the horizon? In our continuing conversation with John Bazzanella, COO of Tennessee Nonprofit Network, we explore the benefits of warning signs and how to use a “red flag” to avoid a “red light.”
What are the “red flags” that indicate an organization is losing control of its budgeting process?
We don’t always see obvious red flags in the budgeting process. Rather, concerns become more evident when monitoring the budget. A common red flag is when revenue and expense actuals vary widely from projections. When I’m working with an organization on a budget, potential red flags I look for include: (1) The nonprofit is not following clear process steps or not adhering to a process timeline; (2) Staff and board members, outside of the person assembling the budget, do not understand or are not engaged in the budget process; (3) Revenue projections appear inflated either without past data to justify the amounts or with heavy reliance on new sources without a balance of established streams with greater reliability; or (4) Some common expense items, particularly for indirect or overhead expenses, are not included or expense amounts appear to be primarily estimated without data or analysis to support.
John Bazzanella, COO of Tennessee Nonprofit Network
What should a nonprofit do if they are “over budget?”
Being “over budget” isn’t necessarily a bad thing or a reason for concern itself. However, it does indicate there are questions to address in a timely manner. The critical concern is why you are over and what impact that has on the nonprofit. Here’s an important question to ask: Where are you in the fiscal year and how does being “over” impact your cash position and obligations? I strongly recommend having a cash flow projection in addition to a budget. While a budget projects amounts for revenue and expenses, a cash flow projection details when cash is expected to come in or go out from the organization. While a budget covers a set period, usually an annual period, cash flow is a rolling projection that can overlap budget periods to give you a broader perspective than a budget alone. Another question to ask when you’re over budget: What can you reasonably project for the next one to three months, and if you’re still projected to be over, are there manageable adjustments to expenses or revenue, or do you have reserves to absorb the overage? And, ultimately, understanding the context for why you are over is always important and often the first question to address. Sometimes being over is the result of something unexpected that might be a good thing or a growth opportunity. Being over budget on purpose or when cash flow is stable and the organization can still meet obligations can often be just fine or even be the result of a meaningful investment for your nonprofit.
Next installment: What about a revenue shortfall?
Check out the other installments:
Working with an Annual Budget,
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