Strategies for establishing a realistic budget

Dice on top of coins that have budget, stock, tools, graph symbols

For many businesses and nonprofits, fall is more than pumpkin spice season; it’s also time to start thinking about next year’s budget. Even for organizations with a fiscal year different than the calendar year, knowing how to approach this important task will make the job easier and help ensure a positive outcome.

Budgeting can feel stressful because it requires decisions and assumptions that will guide your future activities. And really, it should inspire a little anxiety, in that setting a budget should not be taken lightly. But it can also be a time of reflection and excitement for things to come – that is, things that will only come to fruition if you do your homework on the budget.

So how should you approach budgeting? First, ensure that senior leaders are involved at every stage of the budgeting process; their years of experience will be invaluable for setting achievable and realistic goals. In addition, their involvement helps keep everyone more accountable in reaching those goals.

Okay, ready to start? The following steps can help you craft a budget that advances overarching organizational goals and allocates resources for maximum benefit.

1. Delineate the budgeting process.

A haphazard approach won’t yield as much value as a thoughtful, methodical process that evaluates relevant data along with goals and potential challenges. It’s best to create a set timeline that allows adequate time to prepare, review and approve the budget before the new fiscal year begins. Rushing through the process leads to errors and missed opportunities.

2. Start with strategy, not numbers.

Before you address the numbers that will shape your organization’s budget for next year, think about what’s going on in the bigger picture. If you are regularly reviewing financial reports then you already have an idea of where you stand and what hinders your profitability. Dig a little deeper with your senior management team at the outset of the budget process to discuss:

  • strategy in terms of short- and long-term goals
  • assumptions regarding the current business environment and any changes anticipated over the next year or more
  • challenges that limit the organization’s ability to meet revenue objectives (through sales, dues, fees and any other revenue sources) and quantify their impact to the extent possible. Brainstorm solutions for each internal and external barrier.
  • objectives and strategies for individual departments or programs (if they exist), making sure they align with overall strategy. This step is especially important when department or program heads develop strategies for their focus areas apart from the general leadership.

3. Draft a preliminary budget.

Now that you’ve established a deeper context, it’s time to evaluate revenue and expenses. Review financial expectations through the budget period: revenue forecasts, overhead, capital expenses, growth initiatives, staffing changes, etc. Many organizations find it particularly helpful to look back at the trends in actual revenue and expenses over three to five years. You can incorporate this data while applying decisions you made during the strategy discussions to formulate next year’s budget.

4. Review and refine.

Step back and review the budget you’ve outlined. Is it achievable? Is it reasonable? You don’t want to set unrealistic expectations, but at the same time you should not take an overly conservative approach. The sweet spot is a moderate place on the spectrum between the two. The goal is a budget that represents stretching to meet ambitious goals, but not so ambitious that failure is likely. The precise location of that point will depend on your organization’s position in the business cycle (just starting out, growing or fully mature).

5. Monitor.

Keep monitoring the activities and outcomes described in your budget as the year unfolds. A budget sets goals and direction for the year so it’s important to observe how well the organization meets each objective, understand the causes of any variance and take corrective action when needed. However, bear in mind that a budget represents a theoretical goal to which you compare actual results. Do not continuously amend your budget to meet conditions on the ground. Unless the company’s activities or situation changes drastically, observe what’s occurring but don’t modify the budget.

If you have budget-related questions or concerns, reach out to the business and nonprofit advisors at HBP. We’ll help you address organization-specific issues and offer additional strategies for setting budget goals. And once your new budget is in place, we’ll all celebrate with an ocean of pumpkin spice.

Infographic detailing HBP's 5 budgeting tips.

Written by Rally Kamenova, Outsourced Accounting Principal