4 Benefits of a well-prepared budget
November 18, 2013
For most people, the word “budget” is associated with the allocation and management of money. For organizations, especially nonprofits, a budget can—and should—do much more.
All organizations, regardless of their size, should have a budget in place. The benefits of a well-prepared budget can range from a strengthened management team to increased financial support. Here are four we see as important:
1. Budgets provide a financial road map.
A budget can help an organization decipher how to get from here to there, while outlining the resources required for the journey. Furthermore, the budgeting process (i.e., allocating funds to functions) can serve as a powerful planning tool for top management.
Notes about baseline budgets:
A baseline budget—which uses current spending to establish future funding requirements—should be based on the most realistic expectations possible. Once the budget is established, an organization should strongly consider the likelihood of funds noted for each line item. An organization should also prepare a “pessimistic” budget—one based on decreased revenue projections—and determine which cuts will be made if it’s instituted.
Nonprofits should not feel constrained to prepare a balanced budget (revenues = expenses). In fact, there are good reasons why a budget would have a surplus in some years, and a deficit in others.
2. Budgets are an effective management tool.
By comparing an organization’s performance to its budget, management can see if they’re on track to meet goals, or if corrections are needed mid-course. Without a budget, it’s nearly impossible to know if changes are needed in key areas such as development and staffing.
3. Budgets can bolster revenue.
Having concrete numbers in place is essential to securing more revenue through grants or other funding sources. Better “top-line” revenue allows an organization to increase coverage of its mission, while a steady cash flow can help secure loans for capital improvement projects and expansion.
4. Budgets provide an internal control.
Perhaps the most obvious benefit of a budget is this: It allows an organization to effectively monitor its finances. In doing so, organizations can better guard against fraud and other potentially devastating financial risks. Organizations should prepare budgets on a monthly basis to make tracking-to-budget relevant and accurate throughout the year.
Is your organization seeing these types of benefits from your budget? If not, it’s time to think about revamping your budgeting process. After all, a well-prepared budget goes beyond allocating and managing funds; it’s a critical to your success.