By Mandy Potts, MBA
Building a budget is an important step that all organizations must do. The budget is the foundation for what the organization is going to do and how they are going to pay it. The best advice I can give you is to start early (3 months out) with the goal to have the budget approved BEFORE the fiscal year starts.
Here are common steps to complete this process:
Step 1: Look Back and Look Forward
Most financial and budget analysts agree to start with historical data. Take the time to analyze previous years' budgets (I suggest 3 years) and understand the drivers and assumptions behind these budgets. Most of this analysis will be done through variance analysis, which means investigating the difference between the budget and the actual expense.
Do some research about the future. Being active is knowing what the legislature is planning to give your organization. Research grantors and see what their funding objectives are for the next year. Research the Consumer Price Index (CPI) and any other major expenses (drivers) that could cause an impact in your new budget.
Helpful hints: I suggest reviewing anything where the variance is over or under by 10%.
Step 2: Use What You’ve Learned
Clarify assumptions made in last years' budgets and update them with what you’ve learned. For example, if you estimated that health insurance cost will increase 2% each year and the actual cost has increased 10% each year, that is a big increase that needs to be corrected in the new budget.
Step 3: Meet with Department Heads
Financial analysts get a hard time for always being in an excel spreadsheet, head down, and quietly rambling numbers. Occasionally you may here a “AUGH, FINALLY” when we've found the magical excel formula to calculate correctly. It’s true, we love numbers and analyzing data, but we also like to learn about your projects and the great work you are doing. Get out there and meet people! Meet with department heads and ask them what their plans are for the next year and if the budget reflects that plan. Make adjustments where you can and offer suggestions if you can’t.
Note: You should be meeting with department heads on a quarterly basis for a budget review so there are no major surprises at year end.
Step 4: Compile Budget
Take all the information you have learned and build a budget. Start with last year’s budget. For most people, this is created in excel and can be easily copied into a new worksheet. Start with what you know. If you know the revenue is X and that is all you will get, put that revenue number in first and then work on expenses. Once this first draft is complete, this will be known as your base budget.
Step 5: Present Base Budget
There are many steps to presenting the base budget. You may have to meet with the Assistant Director, then the Executive Director, then the Finance Committee, etc. Once that is complete and you have made changes as requested, the base budget will be submitted to the highest authority for formal approval.
Helpful Hint: List any major assumptions as a footnote.
Depending on the size and complexity of the organization, this process could take 3 months or 3 weeks. Regardless, building a base budget is time-consuming; however, the investment in developing a thoughtful budget will reduce time during the year correcting uneducated assumptions or, worse, creating an organizational crisis.
If your organization struggles with thoughtful budgeting, contact Rising Business Consulting today for a free 30-minute consultation.