A central part of managing an organization’s finances is developing and following a budget. It’s imperative to know how much money you have to work with, where it’s coming from, and how you’re going to use it. Money can take on a life of its own, and without intentional stewardship of your funds, it’s easy to spend too much, or not invest the right amount of money developing each part of your mission.
Where should you start when you’re developing a budget? What form should it take? That partly depends on the type of organization you run, as well as its size and structure. If you have multiple departments or programs, each should have a budget that feeds into the overall, organizational budget. Departmental budgets shouldn’t be developed entirely in isolation, since the organization as a whole has a certain total amount of resources available. Senior management should have goals and priorities for the organization that inform how much of their resources are dedicated to each department.
The exact process of developing a budget will vary from organization to organization, but there are a few forms that budgets can take, such as:
- Zero-base budget: A budget from scratch, not based on previous budgets or figures. Every budget item starts at zero and you have to explain or justify each addition.
- Multi-year budget: A budget anticipating revenue and expenses for 2 or more successive years.
- Balanced budget: A budget wherein anticipated revenue equals anticipated expenses.
- Surplus budget, or deficit budget: A budget with revenue higher or lower than expenses.
- Activity-based budget: A budget that is built up from a detailed activity plan of how you will accomplish your work.
- Project budget, aka program budget: A budget for a specific project or program
- Consolidated budget: A budget that brings together several project or program budgets, to show a summary of each and the overall total.
- Donor budget: A budget prepared in the format required by a funding agency, usually submitted with a funding proposal.
Each type of budget has strengths and weaknesses and the best one to use will depend on your needs. A zero-base budget is time consuming and may not be necessary every year, but forces you to think through how you spend money in greater detail. Rather than cruising on auto-pilot, you have to be very intentional about how you allocate funds. Program-level budgeting becomes more important as your organization grows, and should be done in as part of a consolidated budget. You should be thinking at two levels – (1) where the organization currently is, and where it’s going in the coming years, and (2) what each program needs to develop and grow it. This will also help you evaluate potential new programs, and if you can afford and sustain them, and if there are programs you want to scale down or close. This is especially powerful if you have a multi-year budget in sight, so you can plan for the future. A balanced or surplus budget is typically best, with a surplus going towards building up reserves. A deficit budget will be appropriate in some years, such as when you’re investing in a new program that isn’t breaking even yet, when you purchase a large asset, or with a long-term grant where the revenue comes in different years than the expenses are incurred in.
Budgets will get more complicated as your organization grows, both in revenue and in the number of programs you run. The earlier you start, the easier it will be. It can be a time-consuming process, and you would probably rather spend time on program-related work, but investing the time and thought into it is important for the health of your organization. The process of developing a budget will get you to think through what your goals for the organization are, how you prioritize them, and what steps you need to take in order to achieve them. Your budget may develop and change over time, as your organization changes, but with strong financial management, it will help strengthen your organization.