Generally speaking, business is about adapting to growth and change. Markets are always in flux, laws and regulations change to either restrict growth or open up new opportunities, and growth means new challenges, both seen and unexpected.
It’s no secret that your finances need to be as adaptable. An effective budget is always adapting and changing, which means organizations need to review and revise theirs frequently. This is especially true if an entity plans to move into new areas or if resources were spent the previous year to overcome unforeseen challenges.
This blog looks at the reasons why an organization should review their business budget regularly, what that process should look like, and special considerations that nonprofit groups should keep in mind when budgeting for the new year.
A budget provides a financial framework for your organization, and if you fail to develop or update a budget, it invites a host of issues. A good budget guides and predicts—it’s a flexible document, and as long as your entity meets monthly, quarterly, and annually to revise and review it, it will serve as a tool that monitors and supports your operations for the next fiscal period.
Budgeting is an opportunity to set goals, review priorities, explore new opportunities, and detail new strategies to bring in new revenue.
Sound Forecasting – While it’s impossible to predict every eventuality, it is possible to effectively forecast profits and expenditures using historical data. The more sound the forecasting is in a budget, the more effective the budget will be.
Accurate Financial Information – This is where established financial procedures and an updated accounting software system can really shine. Budgets have to take a lot of standard information into account, including sales forecasts, production targets, and pricing that may not be readily available using other means. The effectiveness of a budget can hinge on how accurate and thorough the data used to make it is, which makes the data-collection process one of the most crucial stages when budgeting.
Support From Top Management – Long-term budgeting is often something that is delegated in larger organizations. If this is the case, the entire budgeting process should have full support and cooperation from department heads and C-level employees if they are not directly involved in the process.
Focus on Positive Outcomes, Not Inputs – Budgeting is more than adding up fixed costs and variable costs and matching them against cash flow. Resources are there to produce an outcome, so budgets should try to put resources in place to achieve specific goals. For example, these kinds of goals could be increased customer satisfaction, higher market share, or improved quality.
Effective Communication – Once a budget is decided, it needs to be communicated to the people who have to adhere to it.
2020 was a tough year for many entities, and none have felt the effects more than nonprofit groups. The typical nonprofit most likely had to reevaluate their spending throughout the year, and for many, 2021 and 2022 feel like starting from scratch.
Starting over may not be a bad thing either because the chaos of 2020 and 2021 will make a 2022 budget even more effective through a review of financial sources and expenditures.
Budgeting is important for nonprofit groups because they need to maintain transparency with staff, board members, donors, and other supporters. Transparency is a key ingredient to maintaining trust and confidence for every stakeholder in the organization.
This blog only scratched the surface of why budgets are important for nonprofit and for-profit businesses. While it might be painful, budgeting shouldn’t always be a yearly process, and the best way to take control of your finances is to work with an accountant to develop an effective budget plan and schedule.
Rubino is a budgeting expert for nonprofit entities and for-profit businesses that are looking to add clarity to their financial processes. We specialize in tax planning and financial reporting that solidifies what may have been weak areas in the past. Check our budgeting and financial accounting services and call to schedule a consultation today.