Even as a CPA, I used to think a budget was just the best estimate of where an organization might end up at year-end. I now know that a budget is a critical tool in planning, spending and holding everyone with organizational influence accountable. The budget should start as a roadmap and ultimately serve as a building block for the current operation and future growth of an organization.
Planning for future growth is a continuous process of allocating financial resources to meet strategic goals and objectives. At the end of the day, this planning results in the formation of a budget.
Tips for structuring a budget
- Be cautiously optimistic: Every organization aspires to grow and put initiatives in place to increase revenues year-over-year, however, budgeted increases should also be reasonably attainable rather than the best-case scenario with unrealistic expectations. Increases must be supported by a realistic business plan.
2. Build in release valves: There needs to be room for movement if budgeted revenues for new or significantly increased programs are not trending as estimated. If the budget is fluid, there should be related program expenses or unrelated costs, which were budgeted but could be deferred to a subsequent year or eliminated.
3. Include all stakeholders: All those responsible for specific areas of the budget should be included in the creation of the budget and should be held accountable for actual results compared to the original budget. It’s likely that every budget has several different contributors and responsible parties who each have unique insight into the budgeting process.
4. Always budget to increase reserves: No organization should ever budget a net loss unless there is a specific initiative or investment for which the board has planned. Although many organizations exist to benefit society or its members, it will cease to exist without consistent increases in reserves year-over-year.