The Budgeting process in Non-Profit-Making Organization, with the numerical examples of Greenpeace. Principles of Controlling
The budget process is the way an organization building its budget. Difference from profit making. Budget planning zero-based vs incremental budgeting. Steps in making a budget for a nonprofit organization. Line item budgets and capital budgets.
| Рубрика | Финансы, деньги и налоги |
| Вид | контрольная работа |
| Язык | английский |
| Дата добавления | 27.12.2012 |
| Размер файла | 246,7 K |
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Home Assignment
The Budgeting process in Non-Profit-Making Organization, with the numerical examples of Greenpeace. Principles of Controlling
Student: Tiutina Anna
Teacher: Gabor Vertes
CONTENTS
1 Introduction
1.1 What's budgeting
2 Difference from Profit making organization
3 Budgeting
3.1 Budget planning issues
3.2 Zero-based VS incremental budgeting
3.3 Line item budgets
3.4 Steps in making a budget for a nonprofit organization
3.5 Capital Budgets
Conclusion
References
budget planning making organization
1 INTRODUCTION
1.1 What's budgeting
The budget process is the way an organization goes about building its budget. A good budgeting process engages those who are responsible for adhering to the budget and implementing the organization's objectives in creating the budget. Both finance committee and senior staff participation is built into the process and a timeline is established leaving adequate time for research, review, feedback, revisions, etc. before the budget is ready for presentation to the full board. The annual budgeting process should be documented, with tasks, responsibility assignments and deadlines clearly stated. A good budgeting process also incorporates strategic planning initiatives and stipulates that income is budgeted before expenses. Fixed costs are identified and related to reliable revenue. Budgeting decisions are driven both by mission priorities and fiscal accountability.
In the budgeting process the already known information and facts are taken, reasonable assumptions about the future are made and projected forward on what will be coming into the organization in the way of revenues and what will be flowing out of the organization in the way of expenses. These financial projections are estimates and not “guesstimates”. (Budgeting for Non-for-Profit Organizations ,2009) They are well thought out using historical data as well as what is known about foreseable future events.
During the budgeting process similar items are taken and estimate the amount that will either be spent (expenses) or received as income (revenue) over a perios of time.
The approved budget forms the basis for action.
Preparing a budget for a non-profit-making organization can be on a small scale or a much bigger scale and the complexity is affected by the size and nature of the programs, size of the budget and number of funders and employees.
2 DIFFERENCE FROM PROFIT MAKING ORGANIZATION
Financial management of not-for-profits is similar to financial management in the commercial sector in many respects; however, certain key differences shift the focus of a not-for-profit financial manager. A for-profit enterprise focuses on profitability and maximizing shareholder value. A not-for-profit organization's primary goal is not to increase shareholder value; rather it is to provide some socially desirable need on an ongoing basis.
A not-for-profit generally lacks the financial flexibility of a commercial enterprise because it depends on resource providers that are not engaging in an exchange transaction. The resources provided are directed towards providing goods or services to a client other than the actual resource provider. Thus the not-for-profit must demonstrate its stewardship of donated resources - money donated for a specific purpose must be used for that purpose.
That purpose is either specified by the donor or implied in the not-for-profit's stated mission. The management and reporting activities of a not-for-profit must emphasize stewardship for these donated resources. The staff must be able to demonstrate that the dollars were used as directed by the donor.
The shift to an emphasis in external financial reports on donor restriction has made the use of fund accounting systems even more critical. Budgeting therefore becomes a critical activity for a not-for-profit.
One difficulty encountered in non-profit-making organization is that precise objectives are difficult to define in quantifiable way, and the actual accomplishments are even more difficult to measure. Non-profit-making organizations tend to be mainly concentrated with the input of sources (expenditures), whereas budgets in profit organizations focus on relationships between the inputs and outputs. In non-profit-making organizations there is not the same emphasis on what was intended to be achieved for a given input of resources.
The budgeting process tends to compare what is happening in cash input terms with the estimated cash inputs.
The reason for that is that there is no clear relationship between resources inputs and the benefits flowing from the use of these resources. (Drury C, 2008)
3 BUDGETING
The budget of an organization that relies on contributions is driven by factors such as major donors, campaigns, events, direct marketing and ePhilanthropy. The drivers for a grant and project based organization involve proposal and opportunity pipeline management and contract budgeting and tracking. Key drivers for fee- for- service organizations include variables such as members, patients and clients, fee parameters and business rules, as well as assumptions about growth rates.
Expense budgeting parameters depend on whether the expenses are for labor or other uses. Other Than Personnel Services (OTPS) should relate back to the qualitative plan that you have established, taking your strategies, goals, objectives and tactics into consideration to determine the resources that you need to accomplish your mission. A difficulty that many organizations face is properly targeting expenses to certain programs, departments or both. After deciding where your expenses fall, you must then determine your specific drivers, parameters and business rules, and assumptions based on factors such as growth or decline rates, spreading methods and seasonality factors.
For labor expenses, you must first decide whether you are going to budget on a program or department basis. You may need a detailed position control system that utilizes an organizational chart as a model for pay grades and a basis for the position requisition process. Some of the many factors involved with expense budgeting for labor include union considerations, pay grades, timing of pay increases, benefits formulas, incentives and bonuses.
All the data that is collected from revenue and expenses is usually tracked in a fundraising, financial, human resources/payroll or program (operational) system; but how does it get into the budgeting system? Revenue information is frequently inputted on a manual basis, which could lead to possible errors. Expense data can often be downloaded from HR or payroll systems to load into the budget system, but on an ongoing basis, there may be difficulties capturing timesheets to compare actual expenses to the projected budget. Integrating information between the systems could improve efficiency and produce more reliable budget information.
3.1 Budget planning issues
The scope and size of a non-profit's making programs and asset base dictate the complexity of its budgets. In it's most complete form, a budget is a compilation of the plans and objectives of management that covers
all phases of operations for a specific period of time. If a goal of an organization is to build working capital, it might want to project a budget imbalance of revenues over expenses. However, building too much of a surplus too aggressively might indicate to users of financial statements that the organization is not effectively carrying out its stated purpose. Program priorities should be balanced in an effective budget. The non-profit-making organization's management must allocate its capabilities and resources to impact the maximum number of the intended audience or beneficiaries.
The non-profit-making organizations that charge for their services might not be able to easily increase their prices for their programs. Lead-time for grant requests and multiyear programs must be factored into the budgetary planning process. The financial manager of a non-profit-making organization must prepare the budget to ensure adequate funds for programs slated to be run over a period of time longer than the average budget cycle.
The budget, once adopted, should be used by the staff as a management tool to gauge operational performance. An effective budget should establish criteria that would signal management if a change is needed or if a course of action should be refined or altered. A budget that is updated for new situations enhances its value as a monitoring system. As unforeseen conditions arise, the budget should be tailored to respond to those conditions.
Staff and management accountability is an aspect of budgeting; responsibility should be associated with those that are actually capable of realizing the goals. Without active awareness and participation of those carrying out the organizational mission, a budget's usefulness is diminished.
3.2 Zero-Based VS Incremental budgeting
Zero-based budgeting incorporates the planning process for setting organizational objectives as part of the budgeting process. An organization starts from zero by assuming that no program is necessary and that no money need be spent. Programs that will be continued have to be proven worthy as well as fiscally sound every fiscal year. Zero-based budgeting involves an orderly evaluation of all elements of revenue and expense.
Each program must be examined to justify its existence as well as its effectiveness as compared to alternative programs. Programmatic priorities should be established. Each cost center should be challenged to prove its necessity.
Each cost center's contribution to the overall organizational objective should be measured. Goals and objectives should be clear as well as quantitatively measurable. Incremental budgeting treats existing programs and departments as pre-approved, subject only to increases or decreases in financial resources allocated.
A non-profit-making organization's historical costs are the usual base from which budget planning starts. The focus is on the changes anticipated over or under last year's numbers.
The planning process is considered complete and program priorities as established. The organization must decide whether its budget is to be based on measurable and predictable statistics or only on good guesses.
3.3 Line item budgets
The traditional format for budgeting in non-profit organizations is referred to as line item budgets. It means that the expenditure are expressed in considerable detail, but the activities being undertaken are given little attention. In other words, line item budgeting shows the nature of the spending but not the purpose. (Drury C, 2008)
*Greenpeace financial statement 2011
The amounts in this type of budget are frequently established on the basis of historical costs that have been adjusted for anticipated changes in costs and activity levels. When they are compared with the actual expenditures, line item budgets provide a basis for comparing whether or not the authorized budgeted expenditure has been exceeded or whether underspending has occurred. The data for the current year and for the previous year are included to indicate how the proposed budget differs from the current spending patterns. However it fails to indicate the costs of activities and the programmes to be implemented. In addition, compliance with line item budgets provides no assurance that resources are used wisely, effectively or efficiently in financing the various activities in a non-profit organization. (Drury C, 2008)
3.4 Steps in making a budget for a nonprofit organization
Budgeting for a nonprofit organization is generally made in the following manner -
Step 1: Estimation of overall expenses or program expenses (in case of a program budget). See: sample format below.
Step 2: Estimation of potential income sources. - say fund raising campaigns, drives, grants, endowments etc.) See: sample format below.
Step 3: Matching expenses to potential income source - The income and expenses estimated as above need to be matched. If there is a likely deficit, it could mean reducing budgeted expenses or searching out for new sources of income.
Step 4: Board review and approval - This involves a formal adoption of the budget by the board thus recognizing the expected deliverable.
Step 5: Periodical evaluation of the budget - to assess the achievements versus the target and to review the budget, if necessary. This is the last but the most important aspect, without which the entire budgeting exercise would be futile.
3.5 Capital Budgets
Capital budgeting is the process of making long-term planning decisions for investments. Poor long-term decisions can affect the future stability of an organization because it is often difficult to recover money tied up in bad investments. Good long-term decisions help an organization to extend its reach into the community and to expand the services it provides.
The six stages of capital budgeting include identification, search, information acquisition, selection, financing, and implementation and control. The identification stage involves distinguishing which types of capital expenditure projects are necessary to accomplish organizational objectives.
The search stage explores several alternative capital expenditure investments that will achieve organizational goals. The information acquisition stage considers the predicted costs and consequences of alternative capital investments. In the selection stage, projects are chosen for implementation.
There are several methods that can be used for the selection process. The discounted cash flow method measures cash inflows and outflows of a project as if they occurred at a single moment in time. This method recognizes the time value of money by discounting the future cash flows back to the proposed date of capital investment. Then the initial cash outlay - measured in today's dollars - is compared to tomorrow's inflows of cash - also measured in today's dollars.
The net present value method uses the required rate of return that is the organization's minimum acceptable rate of return on an investment. It is the interest rate organizations could expect to receive elsewhere for the same level of risk. The present values of the cash inflows and outflows are calculated at the organization's cost of capital. These values are then summed to determine the project's net present value. If the value is positive, the project should be accepted. If an organization is considering more than one capital investment, the projects with the highest net present value should be chosen.
The third option is to measure the internal rate of return. The internal rate of return is the discount rate at which the present value of the cash inflows equals the present value of the cash outflows on a particular project. The internal rate of return is that discount rate that makes the net present value equal zero. The three calculations - the discounted cash flows, the net present value and the internal rate of return - tell an organization something slightly different about the proposed capital investment. When evaluating such an investment, all three methods should be used on each alternative investment. The organization should select the investment that provides the greatest rate of return across all of the measurements.
Project funding is obtained in the financing stage. Sources of funding can be internally generated cash or through debt from the capital markets. The implementation and control stage puts the project in motion and provides for ongoing monitoring of investment performance.
CONCLUSION
Financial management of not-for-profits is similar to financial management in the commercial sector in many respects; however, certain key differences shift the focus of a not-for-profit financial manager. A for-profit enterprise focuses on profitability and maximizing shareholder value. A not-for-profit organization's primary goal is not to increase shareholder value; rather it is to provide some socially desirable need on an ongoing basis. A not-for-profit generally lacks the financial flexibility of a commercial enterprise because it depends on resource providers that are not engaging in an exchange transaction. The resources provided are directed towards providing goods or services to a client other than the actual resource provider. Thus the not-for-profit must demonstrate its stewardship of donated resources - money donated for a specific purpose must be used for that purpose. That purpose is either specified by the donor or implied in the not-for-profit's stated mission. The management and reporting activities of a not-for-profit must emphasize stewardship for these donated resources. The staff must be able to demonstrate that the dollars were used as directed by the donor. The shift to an emphasis in external financial reports on donor restriction has made the use of fund accounting systems even more critical.
REFERENCES
1. Drury C. (2008) Management and Cost Accounting, 7th ed. Hamshire, London: South-Western Cengage Learning.
2. Blackbaud (2011), Financial Management of Non-Profit Organization, [Online]. Available at: https://www.blackbaud.com/files/resources/downloads/WhitePaper_FinancialManagementForNPO.pdf (Accessed on 20/11/2012).
3. Budgeting for Non-for-Profit Organizations (2009), Board Development [Online] Available at: http://culture.alberta.ca/bdp/bulletins/BudgetingforN-f-POrgs09-print.pdf (Accessed on 24/11/2012).
4. Greenpeace International (2011), Annual Report, Amsterdam, The Netherlands. Available at: http://www.greenpeace.org/international/en/about/how-is-greenpeace-structured/reports/#a0 (Accessed on 24/11/2012).
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