This article was written by Tyler Sass, CPA, Manager at The Bonadio Group
A well-thought-out budget continues to be a staple for financially sound tax-exempt organizations (TEO). These organizations continue to face relentless challenges brought on by the pandemic. Just as the pandemic has warped our perception of time, it has warped our financial outlook as well. Devoting time to budgeting can provide clarity, guidance, and direction for TEOs.
The budget process should not be an exercise placed solely upon the finance department. The process should incorporate other departments and allow those department heads take ownership of their spending. In bringing in non-financial departments, it develops collaborative thinking which can assist in addressing various organizational goals and challenges.
Further collaboration is cultivated as part of this process as it facilitates financial dialogue between management and governance. The pandemic has impacted how governance and the management team interact. The shift to virtual meetings can be a positive, as it may increase the frequency in which boards and committees can meet due to the ease of scheduling. However, it can be a negative due to the challenges of effective communication in a virtual setting. Really diving into the budgeting process and creating committees tasked with the budget development can reestablish or strengthen these connections.
With all the regulatory changes and compliance, it is easy for the budget process to get lost in the shuffle. It is important to take the time and really think through the development of the budget. In doing so, it allows the TEO to take back financial control. By evaluating where the projected revenues stand, the TEO can evaluate how to expend those resources to best meet the needs of the people served.
Projecting revenue in the coming year is easier said than done. Many TEOs experienced substantial government support in one form or another. Budgeting for continued government support outside of the normal course of business is a risky proposition; however, if there is funding on the horizon that the TEO is aware of, developing contingency budgets based on different presumed support levels can be an option. If the TEO looks to exclude these funds entirely, it can be beneficial to look at pre-pandemic revenue levels and adjust for assumed changes for the coming year.
Just as developing budget assumptions surrounding revenue presents challenges, so do expense assumptions. Generally, TEOs should look to their largest expenditure line and pour the most time into those related assumptions. In many cases, personnel expenses make up the lion’s share of expenses. Looking at pre-pandemic staffing levels can provide insights; however, the labor market’s outlook has shifted substantially. Minimum wage continues to rise, both increasing expenses and creating wage compression at different staffing levels. Many government aid programs were geared towards employee retention and even resulted in increased wages or bonuses to staff not in the normal course of business. Non-personnel related expenses can have similar complications when projecting due to a variety of factors such as supply chain interruption, inflation, or a myriad of other factors.
Organizations should strive to develop a budget that balances (i.e., revenues equal or exceed expenses). At times, it may be permissible for a TEO to approve a deficit budget; however, those instances are limited. If the organization is unable to come up with a balanced budget, the organization needs to take a hard look at its service offerings, mission statement, and strategic plan to evaluate how to proceed. In the interim, the organization should strongly consider developing cash flow projections and an overall sustainability analysis.
Budgeting is a year-round activity. TEOs should monitor financial performance throughout the year and compare it to budgeted expectations. In doing so, the budget can be utilized as an effective decision-making tool as well as a way to monitor financial performance and provide transparency. If during that process, budget assumptions experience wide levels of variance, budgets can be amended to reflect the change in direction.
With all that is changing at rapid speeds, it is easy to see budgeting as just another task to complete; however, given all the benefits outlined above, it is important that the budget process remains a focal point for organizations.
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This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.