the mission, and geographic location of the services delivered (service delivery area). These assist in determining the overall scope and size of the organization in the context of the broader mission. NOTE: Establishing the mission and mission statement of the organization is a critical step in strategic planning for organizational development.
Fiscal Year
Establishing the fiscal year for center operations is a key step in the financial planning process. Identifying the fiscal year is often the result of both contract and funding requirements or regulatory requirement based upon a particular federal or state fiscal year. Reviewing the regulatory language of established contracts or those the organization is seeking can assist in determining the time frame required for establishing the fiscal year. For example, many state contracts require a fiscal year, which is coincidental to the state’s constitutionally adopted fiscal year. Conversely, many federal contracts will stipulate a contract period, which may be
coincidental to the organization’s fiscal year, may be in conflict with the federal fiscal year, or may span several calendar years.
In this event, the adoption of a fiscal year most closely following the time frame for delivering the services the organization is contracted to perform is suggested.
Establishing the fiscal year is a recommendation that the treasurer of the board should make to the board in consultation with executive management. The board’s action on establishing its fiscal year in turn sets the time frame for two critical corporate activities; the annual budget and external independent audit. Once the board of directors adopts the fiscal year through resolution, the time frame for the annual budget can be identified.
Annual Budget
The annual budget is actually a “cash” or “operating” budget, which identifies the sources of revenue and expense that the organization will utilize during its upcoming fiscal year. It is the responsibility of the executive director to ensure that a comprehensive, accurate budget and subsequent modifications are developed annually and presented to the board of directors for review and approval. It is the responsibility of the board to review and approve the annual budget prior to the beginning of the fiscal year, and any subsequent budget modifications, and ensure that, in the case of IL Part C funds, RSA pre-approval of budget modifications are obtained.
The format and structure of the annual budget are comprised of two basic elements: • Revenue—dollars earned by service delivery, sales, donations, investments, etc. • Expenses—outflow of cash
Beyond these two broad categories, sub-components of the budget include four aspects. These are: • Fixed Revenue
• Variable Revenue • Fixed Cost
It is important to identify the elements of the organization budget by delineating all revenue and costs in terms of fixed and variable. Fixed revenue includes those income sources that have an annual commitment, e.g. Government contracts, United Way contracts, donation commitments. Variable revenue will be your assumptions regarding planned but not committed or “guaranteed” revenue, understanding that no revenue is guaranteed. Included in this category are fundraising, donations, sales, and any pending new contracts. Since the largest cost center for most not-for- profit agencies is personnel costs, it is imperative to identify fixed costs which the organization must meet as a result of prior obligations before staffing levels and salary ranges are established. Fixed costs are those in which there is no fluctuation or variance in the amount during a given time period.
Examples of a fixed cost would include items such as rent, fixed mortgage payments, vehicle leases, or insurance premiums.
Variable costs are those that fluctuate during a certain time frame, i.e. monthly or annually, and are subject to internal and external factors that can cause these costs to either increase or decrease. A variable cost that is impacted by an internal factor would be staff overtime due to vacancies in a department, employee illness, or vacations. An external factor on the same variable cost
(personnel) would be consumer demand for services.
Another example of a variable cost impacted by external factors would be utility costs, which are affected by weather. An unusually mild winter and hotter than normal summer can cause
variations in utility costs which can be both beneficial or negative in terms of their impact on the annual operating budget.
Budgeting
Once the two broad categories of revenue and expenses are delineated, the annual budget document identifies three sections:
• Cost • Revenue
• Net operating fund balance (profit or loss)
Categories for cost in the annual budget for the NFP typically include five major categories. These are: • Personnel • Fringe Benefits o Mandated o Non-Mandated • General Operating • Property
Personnel costs should identify the name, title, annual salary, and/or rate of pay, and functional program area where the employee is allocated.
The fringe benefit section should include all the costs, which are mandated by state and federal law. These include Social Security tax (FICA); workers compensation; disability insurance (where applicable), and unemployment insurance. Non-mandated benefits include health/dental insurance, retirement plan payments, continuing education benefits, life insurance, etc. These costs should be allocated to the same program area where the personnel cost is allocated. The same percentage of cost should be equally allocated for employees such as a supervisor who is allocated to multiple programs (cost centers). For example, a supervisor who oversees a disability program, IL program, and transportation service would have their salary distributed in thirds over these three programs. Accordingly, the fringe benefit costs of that supervisor would also be divided in thirds among the three programs.
General operating costs include those costs that are directly attributable to the operation of the program area being budgeted. These include the following:
• Telephone (local, long distance, and monthly service) • Postage
• Staff travel
• Vehicle costs (lease or financing payments) • Vehicle insurance
• Vehicle maintenance and operating • Office supplies
• Program supplies (educational material etc.) • Equipment
• Continuing education/conferences • Copy cost and printing
• Conference costs Property costs include:
• Program/office rent • Office utilities • Property insurance • Maintenance and repairs • Capital improvements • Property taxes (if applicable) • Debt service
Administrative cost centers, or management and general (M&G) costs, are those incurred in the operation of the overall organization that cannot be identified as a particular program or contract cost. These costs must be allocated on some form of rational basis that is allowed by the funding sources the organization contracts with.
• Administrative salaries • Administrative fringe benefits • Office rent (direct or allocated) • Office utilities (direct or allocated)
• Office phone (local, long distance and monthly line charges) • Office equipment (lease costs and purchases)
• Office supplies (consumable) • Staff travel
• Staff conference/continuing education • Audit/legal costs
• General liability insurance • Directors and officers insurance • Other risk policies
• Bank fees/interest expense • Fund development costs
Each of the major four categories of cost (personnel, fringe benefits, general operating, property) should be sub-totaled and balanced to the total costs for each category or line item of expenditure. The costs for management and general will be allocated to each cost center or program area based upon the method chosen by management. This area will also be sub-totaled with a grand total identified as bottom line expenditures.
The next section of the budget directly below each program category is the revenue section. This identifies by line item each of the revenue sources the organization utilizes. Examples include:
• Federal or state contract revenue—CIL funding • United Way revenue
• Grants
• Fundraising revenue • Earnings from investments • Client fees
• Third party reimbursement
Identifying these and other revenues for each program area allows for a grand total to be
determined for each program. A simple deduction of expenses to revenue by program identifies any surplus or deficit in funding for the overall organization or a particular program area. Projections of operating revenue (contract funds, fundraising revenue, etc.) also consist of fixed and variable projections. Fixed revenues are quantified contracted funds where the amount is certain (e.g. contract revenue defined in the contract).
Variable revenue is income, which may vary or fluctuate based upon certain factors such as units of service, fundraising, sales etc.
NOTE: Remember, it is always necessary to identify fixed costs and revenue and to place these into the budget first, since there is no management discretion in changing these line items.
The last primary section is the net operating fund balance or Profit/Loss (P&L). This is a simple calculated estimate of program or agencies total revenue minus total expenses. A fiscally prudent annual budget will project a balance of revenue to expenses or a projected fund balance (profit). However, based upon the mission of the organization, a given year’s annual budget may project an operating loss if the services provided are determined to be of greater benefit to the community or the organization as opposed to the potential risk to the organization (risk/benefit analysis).
Management or the board of directors should only adopt a non-funded or deficit budget where there are sufficient capital operating reserves identified which can offset the deficit. Because of limited reserves (Net Assets) in NFPs, a deficit budget should be limited to one fiscal year and avoided whenever possible.
Appendix F illustrates two sample budgets using these core sections.
Reporting
Once the annual operating or “cash” budget is established, subsequent activity should focus on recording expenses and revenue, and reporting them for management analysis and board review. Reporting can be viewed from two primary perspectives, internal and external. While the information presented in both reports match on a mathematical basis, they vary in format and content.
Often the revenue and cost information necessary for management decision-making is very different from a cost report to a funding authority. The examples of this chapter illustrate these differences.
Internal Reporting
Internal reporting commonly referred to as income statements or monthly statements are for management, finance committee, and board review. These should include a minimum of seven columns of information:
• Monthly expenditure actual • Monthly expenditure budgeted • Variance
• YTD expenditure actual • YTD expenditure budgeted • Variance
• Annual budget (line item)
From these a line-to-line comparison of each budgeted item to actual expenses can be monitored. Most commercially available accounting packages can depict this information provided the proper coding of revenue and expenses is established during the initial set-up of the general ledger. From these statements, annual cost reports can be compiled which will generally conform to the reporting requirements imposed upon the CIL by the various funding sources (e.g. federal/state government, United Way).
External Reporting
Cost reports and the independent audit comprise the two primary types of external reporting. Both of these have very distinct purposes, and serve unique functions for the NFP. Cost reports depict the income and expenses in a predetermined format for purposes of accountability, revenue
reconciliation, allowable expenses, and compliance with contract requirements. The CIL will need to know the specific cost report requirements of each funder and assure any software purchased can meet these needs.
These reports may also be required on a periodic basis such as quarterly, semi-annually, and annually. These are generally dictated in frequency, format, and detail by the funding source. They are also typically a requirement of contract management.
NOTE: Many governmental contract agencies will provide free technical assistance in the compilation of cost reports and may provide free software for use in cost reporting.
The second component of external reporting is an independent audit conducted in accordance with OMB Circular A-133 based on the Single Audit Act of 1984 (amended 1996). This must occur in any year that the CIL has $500,000 or more of expenditures of federal awards. This assures compliance with generally accepted accounting principles or GAAP standards, and assures that funds are received and expended in a fashion that is consistent with these standards. It also assures regulatory compliance with IRS code regulations under section 501(C)(3) with respect to the use and purpose of the funds.
NOTE: In addition to contractor requirements and the IRS, the individual state and/or municipality may require other legal filings of an independent audit. Check with your auditor for these
requirements in your state.
Projections
For agencies with sufficient staff capacities, financial projections can be an extremely useful tool in maintaining a balanced budget and developing net assets (profit). These financial projections generally follow the format of the annual budget.
Compiling the year-to-date (YTD) costs (either monthly or quarterly) is necessary up to the point in time that the projection is developed. Future periods can be “projected” based upon a rolling balance or average of YTD expenses. Adjustments can then be made for such factors as
anticipated overtime, peak staffing needs, vacancies or fluctuations in revenue based upon predictable or assumed information (e.g. a new contract or a charitable gift). This comparison of revenue to expenses over time, gives a projection of where the organization will end up in financial terms at the conclusion of the fiscal year.
Projections can also be helpful in assessing the potential for net fund development or erosion based upon changing factors the NFP encounters during the fiscal year. This information can then be incorporated into management decision-making to adjust services according to the financial ability of the organization during the operating year, resulting in a reasonable expectation on the outcome of either a deficit or surplus at year-end. They can also be valuable in predicting cash flow needs during certain periods that can be used to quantify short-term borrowing from banks.