The end of the financial year is fast approaching, so it’s time to start preparing next year’s budget.  A good budget provides the board of your NFP with a means to measure past, current and future performance, and makes projections about items and potential events that can affect the NFP in the future.

Why a Good Budget is Important

The budget also assists your NFP’s board by giving it information that is critical to their ability to make wise choices as they make plans and decisions about a wide range of needs. Common decisions that your NFP might make with this information include: whether or not to expand or cut back on the services that they offer the community, what types of training to offer volunteers, what methods will be used for fundraising and even how much funding is needed for both short and long term goals.

The budget then is literally a roadmap that guides the board of your NFP as they direct your organisation. It is not carved in stone, but is a flexible document that can be revised throughout the fiscal year as information is updated and conditions unexpectedly change.

Why Every Budget Should be Reviewed and Updated Throughout the Fiscal Year

In fact, it is important to review the budget periodically throughout the year to prevent costly errors from affecting your NFP’s finances and performance. Without review, your NFP’s board might make decisions based on outdated information. Examples of circumstances where this can frequently occur include: failing to review standard figures such as not reviewing automatic cost adjustments from year to the next, or not adjusting projections after a sudden increase or decrease in funding, particularly public grants. Events like these are common in the public and private sector and can lead to a shortfall that threatens the ability of your NFP to meet all of its obligations to the community.

Is an Incremental Budget the Best Model for Your NFP?

As a general rule, most public NFPs use an annual budget that is modeled on an incremental basis. While this budget is seen as simple and straightforward, it might not be the best model if it doesn’t help your board pinpoint important items that affect their ability to make proper and realistic plans.

Examples of potential shortfalls with this type of budget include: limited information about which of the NFP’s activities are beneficial to the community and cost effective, not being able to discern which departments are either over or underperforming, difficulty with determination of costs and performance of a larger NFP with multiple services, or multiple divisions.

In instances such as these, you might want to consider providing your NFP’s board with a budget model that is capable of providing more focused information in specific categories.

Understanding the Differences in Other Budget Models

These additional budget models include planned programme budgeting systems (PPBS), zero-based budgeting (ZBB), and the efficiency budget model. With a PPBS budget model, multiple years are typically included, which makes it easier for the board to make longer range plans or to measure performance for service projects that will span multiple years.

The ZBB budget model allows the board to have greater control over expenditures that are not critical to the NFP’s mission. In this model, the budget for each cost is automatically 0 unless the board specifically approves funding. Managers over various departments make requests for funds which are reviewed by the board before they are either granted or denied. This type of budget helps the board to quickly find obsolete methods with high costs and low returns, so that changes can be made. Many local governing boards use this type of budget to ensure greater control over funds and increase both the value of services that are received as well as improve accountability.

The efficiency model of budget allows boards to quickly see if the resources of the NFP are being put to good use, as it allows for a direct comparison between funding and other resources that are spent by a department or on a specific service project, and the performance results. This type of budget is especially helpful for NFP’s that have a history of cost over runs and budget shortfalls, as it also gives greater control, accountability and transparency over how funds are used.