Budgets

Amita Patel GreerDirector of Business Advising & SBDC

Montana CDC 

229 E. Main St.Missoula, MT  59802

406.728.9234 ext 214406.542.6671 faxwww.mtcdc.org

OUR MISSION

We provide financing and consulting services that transform the lives of

individuals and strengthen community prosperity.

What do we do?

Rachel Edington—Gluten Free Mama, Polson, Montana

• Small business loans

• Consulting

SMALL BUSINESS LOANS

Nova Café—Serena Rundberg, Bozeman, Montana

• Nearly bankable businesses

• Term loans

• Lines of credit

• $1,000 – $1,000,000

• Start-ups

• Existing businesses

• 1% - 2% higher than banks

CONSULTING

Tri-State Restaurant Supply—Jim Bliss and Shelly Smith, Kalispell, Montana

• FREE

• Business plans

• Cash flow projections

• Government contracting

• Education and training

• Business idea evaluation

INTRODUCTIONS: WHO, WHAT, WHY?

Financial Statements

Financial Statements

Growth is good…right?

“Grow or die” or “Growth is always good” or “Bigger is Better”

Grow…But Only If It’s

•A Well-Thought-Out Decision•Managed, Efficient Growth

What’s a Budget?

A Budget is a…

Breakdown of a spending plan……it must be realistic, accurate and controlled

A Budget is a…

Summary of short-term operational activities of a organization (usually 1 year)

Budgets are about numbers

Why do we need one?Everyone in the organization needs to understand the budget, because to understand the budget is to understand the goals of the organization

Budget = Planning Tool

Ex. A nonprofit makes up its initial budget. It looks good and there may even be a surplus at the end of the year. It’s finalized by the board.

However, budget isn’t reviewed again until two months before year’s end. During the year, no one enforces any controls. When the budget is finally reviewed, several expenses in more than one department are over budget and revenue is under budget.

Step 1: Prepare a Revenue BudgetSet up two revenue budgets:The “Known” Budget AND “What If”

Budget

Step 2: Prepare an Expenditure BudgetAlways include a “contingency” line item for

emergency or unexpected expenses

“Known” Budget and a “What if” BudgetPlan for emergencies, additional expenses

Break down expenditures into Fixed and Variable expenses

Step 3: Prepare an Overall BudgetBe sure all departments review your initial budget

Then prepare the overall budget

This summarizes the entire organization’s revenues and expenditures

Step 4: Prepare a Budget ReportA budget report compares actual to budgeted amounts

You should prepare and analyze your budget report every month in order to control your budget effectively

Share Your BudgetOrganization A: Before initial budget meeting, staff from a variety of departments are chosen as budget coordinators and then budget coordinators review the revenue with these questions:

1.Will there be an increase or decrease in revenue? If so, how much? How will it affect the department’s operation?2.Do we expect any unusual expenditures for the year?3.Any changes in personnel due to factors such as retirement or maternity leave?4.Any changes in tax rates, fringe benefits, rents, etc.

Don’t Do This…Organization B: Accounting department prepares the budgets for all the departments. Once the budgets are prepared, they are given to the department heads with little or no input from the managers.

Departments are periodically told if they are within budget. If a line item is over budget, department does not feel responsible because of the lack of input it had in its initial preparation.

This Is A MUST…Management should review Budget on a monthly basis

Board should receive a copy on a monthly basis

Managers should meet with Finance on a monthly basis to discuss financials and any unbudgeted expenditures

Budget: Best Practices• Know your goals• Have “buy in” on your process• Involve staff at other levels• Budget capital expenditures• Budget a surplus• Project cash flow• Budget temporary and permanently

restricted revenue

Why Budget a Surplus?• Ensuring that your organization can

sustain itself during an unexpected change or difficult period

• Work with management to project a surplus; identify other revenue sources

Project Cash Flow• Prepare a monthly cash flow

projection with your budget

• Monitor and adjust monthly

• Review with management and board

Budget Temporarily & Permanently Restricted Revenue

Why budget for these revenue sources if they do not hit my Unrestricted Column on my Statement of Activities?

•They will affect your final organization surplus/deficit result

•Provide revenue goals and results for fundraising for future years

Top 5 Mistakes1. Budget is not contained in the accounting

system but maintained in Excel spreadsheet

-Difficult to keep budget accounts properly aligned with accounts in the accounting system

-High potential for error due to the manual work involved

Top 5 Mistakes2. Budget is not seasonal

-Monthly budgets are often created by dividing the annual budget by twelve, rather than taking into account seasonality when doing monthly budgets

Top 5 Mistakes3. Significant variances from budget are not clearly identified

-some variances may be small and not worthy of management’s attention

-larger variances (over 10%) need to explained and justified

Top 5 Mistakes4. Variance explanations do not properly identify underlying cause of variance.

-Instead of saying “salaries are higher than budget due to a higher number of employees than planned”

-Say “salaries are higher than budget due to hiring additional employees to meet greater than expected demand for services”

Top 5 Mistakes5. Budget Process is not clearly defined.

-There should be a financial policy that specifies who is responsible for developing the budget, who is responsible for approving it, and the timeline for this to occur

Case Study: Hull HouseFounded by Nobel laureate Jane Addams in 1889 to help Chicago’s immigrants build “responsible, self-sufficient lives”

?

Case Study: Hull HouseFounded by Nobel laureate Jane Addams in 1889 to help Chicago’s immigrants build “responsible, self-sufficient lives”

Provided foster-care services, job training, counseling and literacy and education programs at more than 40 sites throughout Chicago

On Jan. 27, 2012, Hull House closed

One blogger wrote: How could a board that included prominent lawyers, management consultants, financial advisers, and corporate executives have allowed a 120-year-old community institution to collapse under its watch?

Case Study: Hull HouseChairman of the Board blamed the economy. Increased demand for social services but government agencies and foundations reducing their support.

However, if you look at their financial statements, its June 20, 2007 balance sheet showed that its unrestricted net assets were negative $2.3 million

Hull House was millions in the red before recession even began

Board Chairman said that financial reports prepared by management had sugar-coated the situation and because staff members maintained a positive attitude, board failed to understand magnitude of financial problems

Case Study: Hull HouseHowever, Wood, a former chief executive of Hull House who retired in 2011 criticized the board for not understanding the idea of “living on the edge”

Wood: “staff members like me were staying positive in attitude [because] we are very used to social-service agencies always being on the brink of destruction”

Both the board and the management staff failed to recognize the crisis while there was still time to turn things around

Case Study: Hull HouseHowever, Wood, a former chief executive of Hull House who retired in 2011 criticized the board for not understanding the idea of “living on the edge”

Wood: “staff members like me were staying positive in attitude [because] we are very used to social-service agencies always being on the brink of destruction”

Both the board and the management staff failed to recognize the crisis while there was still time to turn things around

Common Mistakes1. Using all cash first and then need financing because the business ran out of cash

2. Using short-term debt to finance long term assets

3. Using credit cards--easy money but not great if you can't pay it back right away

4. Getting more debt to plug in holes when business model doesn't work

Snake Chart

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