Leaves are falling off the trees. Winter is just around the corner. And it’s time to get the annual budget ready. It’s a best practice to have the budget approved by the board – ideally before the year starts. I know of a few organizations that don’t get their budgets approved until February or March – which is just a tad bit late. I have done a lot of budgets and as a CPA I have helped organizations prepare their budgets. Here are just a few mistakes to avoid when preparing your budget.
Unrealistic revenue projections. I like to look back at the trends over the past three years to see where revenue is headed. Right now, we aren’t seeing great trends in donor giving so it is a little unrealistic to project a 20% growth in revenue when cumes are down and fewer people are giving more money. I have seen several stations set unrealistic goals at Sharathon and it is no surprise when the audience or past trends just aren’t there to expect that kind of response. I find it’s also helpful to break revenue down into categories – donor revenue, underwriting revenue, tower rental, program revenue, etc. When you have this level of detail you can make better estimates going forward.
Not budgeting all the costs associated with hiring an employee. Everyone wants more people, but there is more to the cost of an employee than just the salary. Most organizations have benefits (health insurance, retirement, etc.) to also account for. Even if you don’t have a lot of fringe benefits there is still an extra 7.65% all employers must be paid for their portion of Social Security. As a rule of thumb, budget about an additional 25-30% on top of their salary for each person you hire. If you hire someone for $50,000, then you would budget $65,000. Also, don’t forget on top of that to also account for what they will need to do their job – computer, licenses, workspace, travel, seminars, etc.
Growing unevenly. I like to think of our stations as having a front office and a back office. The front office is the front-line part of the organization – the DJs, production and promotions people and everyone else making a direct impact. Then there are those people in the back office, the accountants, lawyers, HR people, admin, who are the structure of the organization. The goal here is to not to budget in one area and not the other. If you don’t have the office structure to support the creatives, then you run the risk of inefficiencies and chaos – and perhaps even getting the organization into trouble with oversight organizations – which can be a major distraction. If you spend too much on the structure side, you run the risk of being knee deep in rules and polices and you don’t have an impact on people. The key is to make sure you grow evenly. When you add another program or great creative idea, are their people in the back office who can support that?
No budgeting cushion. Ideally every nonprofit should have 3-6 months of operating cash reserve on hand. Non-profit doesn’t mean you can’t make a profit. It means that all your revenue is going to your exempt purpose. Having a reserve on hand is a best practice. Your budget should reflect some cushion so you can put revenue in that reserve. Things happen. Budgets are just estimates and if there is an overrun, your cushion can handle it. I like about a 5-10% cushion of net income over expenses – just in case. Also, a footnote. I know of some organizations that have done a negative budget – where they forecast a loss during the year because they want to use leftover cash from the previous year. While it is okay to do this, I really discourage it. If you did it, then I would want know the plan to produce revenue. If there isn’t a plan for more revenue, then eventually the organization will be in financial trouble since that capital overage will run out.
Not getting input from staff. Years ago I used to do budgets with just me and the bookkeeper. It was glorious. We could crank out the budget in just a few days or even a few hours. The problem was is that may be good for a small organization and was very efficient (for me), but if you want to get bigger and have a better budget, then you need to invite the staff into the process. Leaders need to empower people and this is a great practical way to empower your staff. I know firsthand that making this change is a long process. The first time we did it, it took well over a month to put together the budget together. While secretly I knew it was quicker to do it the old way, the power of this process made the result a much stronger budget. It also created a better work culture because it gave leaders a real say in where we were headed.
Besides being a broadcaster for over 40 years, Tim is also a CPA. He does consulting and financial consulting. He may be reached at Tim@TimMcDermottconsulting.com