Lesson 9b

Question 1

1. explain why budgeting is an important guiding factor in not-for-profit organizations

Answer 1

Budgeting is an important guiding factor in NFPOs because often the funding for spending any money requires legislative approval. Budgets specify:
- the period covered by the budget
- the sections and amounts that can be spent
- the goods on which money can be spent
In NFPOs, services are often rendered within the constraints of money received, so a budget enables one to identify how the spending should be done.

Question 2

2. explain how the revenue side of a budget in a not-for-profit organization is determined from the expenditure side.

Answer 2

Revenues are determined independently of expenditures. They are often achieved via charitable donations or grants. Whereas expenditures often predetermine where or how the revenues should be obtained. Eg. A government organization pre-identifies its expenses so it can determine the amount of revenues needed and charge taxes accordingly. Other NFPOs limit their expenditures based on the amount of revenues received, since they can only spend what they have and provide services in accordance with the donations, funding and grants received.

Question 3

3. explain how budgets are prepared for the government sector

Answer 3

In the government sector, budgets are prepared by determining what services and service levels are needed. Then they determine how much taxes are needed to cover those expenses and have the budget approved by the various government levels before it is implemented. If they raise taxes too high, they run the risk of losing the next election, so a fine balance must be maintained. Many NFPOs use the budget as a spending cap.

Question 4

4. describe the specific budgeting issues that must be addressed by not-for-profit organizations

Answer 4

Specific budgeting issues addressed by NFPOs are:

• NFPOs need to demonstrate the stewardship of resources provided
• They need to pay close attention to whether they have the $ to continue providing services to its clientele
• Their budgets need to identify financial problems that could arise in the future
• Their budgets should provide indicators for gauging staff performance and provide goals to reach
• The scope and size of the organization could dictate how complex the budget must be as monies need to be tracked for each section
• The budget needs to be as balanced as possible without too much of a surplus or deficit to indicate poor management
• Lead time for grant requests and multi-year projects must be factored into the budget
• The budget should be updated to reflect new circumstances

Question 5

5. explain the differences among incremental, zero-based, and flexible budgets.

Answer 5

Incremental:
Incremental budgeting is a simple approach that is often used. The current year’s budget is the base and amounts are added for salary and wage increases, increases in the cost of supplies and equipment to be purchased, program expansion, and a higher level of service to be rendered. The budget is decreased for program reductions, reduced level of service, and cuts in capital equipment purchases. Decisions regarding increases or decreases in programs and the level of service (two staff vs. eight staff) are based on politics (how important is it to the voter?) and economics (how
much will it cost and how will it affect taxes?) rather than purely on productivity.

Zero-based budgeting:
o incorporates the planning process for setting objectives as part of budgeting process
o starts from 0 and assumes nothing is needed and nothing needs to be spent. Programs need to continually prove they are worthy and fiscally sound
o requires an orderly evaluation of revenues and expenditures. Cost centres need to continually prove their value, programs need to continually be evaluated against other options
o goals and objectives must be clear and quantifiably measurable

Flexible budget:
One of the most useful tools in budgeting for not-for-profits is flexible budgeting, where budgets can be prepared for various levels of service.
Tables 9.1 and 9.2 depict a flexible operating budget for a fictitious organization that provides food and clothing to the homeless. As you can see, the budget varies based on the number of clients served. The key distinction in the budget is the difference between
variable and fixed costs and revenues. In this case, clients pay a minimal fee ($2 per visit) to utilize the service—this represents variable revenue. Similarly the cost of supplies will vary with the number of clients served (in this case, supplies are budgeted at $16 per
visit). However, other costs are fixed such as salaries, rent, and utilities (assuming these costs provide the level of capacity required). Revenue received from the donation of $1,000,000 will not change.