BUDGETING PROCESS

Budgeting Process



Budget Processing

Introduction

“It's not in the budget” is a familiar refrain. An unanticipated major repair, a long-standing grant that is not renewed these events can alter expense and revenue in ways that can compromise the ability of a nonprofit organization to fulfill its charitable purpose. A budget gives a projection of revenue and expense over the course of a year (Kim, 2008, pp. 18). It is a plan that communicates an organization's priorities and a tool that can be used to monitor revenue and expense. A budget is usually prepared by an executive director and approved by a board of directors. Operating budgets, program budgets, cash flow budgets, and capital budgets are frequently used by non-profits.

This paper begins with a discussion of what goes into a budget and how a budget is prepared, offering examples of an operating budget and a cash flow budget. It continues with an examination of trends and forecasting in the context of non-profits engaged in health care, education, human services, and the arts. One important development is an increase in revenue from fees and earned income. For this reason, the chapter concludes with examples of how to estimate cost; specifically break-even and marginal cost analysis. This approach ensures the future forecast will be a financial success (Merchant, 2005, pp. 20).

Discussion

Operating budgets, often referred to as simply the budget, are prepared on a cash basis; expense is incurred, and revenue is received over the 12 consecutive months that make up the fiscal year. Usually, a budget is balanced; that is, revenue is equal to expense. The process of formulating expense and revenue projections often begins 6 months before the start of a new fiscal year. It involves the executive director, program director(s) or department heads, and the chief financial officer (if there is one). Typically, an executive director asks program directors to project expenses for their program. Revenue is usually estimated after expense. Revenue and expense planning may also involve the treasurer of the board of directors or a board finance committee. The board of directors formally approves the final budget (Kaplan, 2006, pp. 27).

Need for budgeting

Every Company needs a budget to run its operations in a smooth manner and make plans for the financial year. The budget helps a company allocate its resources properly and wherever needed. Without having a proper budget, a company cannot operate in a normal way because it would not know how much money is needed for the operations and how much expenses are expected to occur over the year (Jensen, 2006, pp. 56). The possibility of financial control would be zero because the company will not have any tool to measure the expenses. Budget is a tool for financial control because it gives an idea for the total expenses, which are expected to occur over the period (Feltham, 2006, pp. 29). The budget also gives the company information about the surplus money or the shortage of cash, which is expected in the financial ...