Presentation by Russell C. Pomeranz

1. Presented by Russell Pomeranz, MBA &
Terence Cook, MPA
November2009
The Latino Nonprofit Financial Management Initiative is a project by the
Hispanic Federation and presented in partnership with
Fiscal Management Associates.
Latino Nonprofit Financial
Management Initiative
Session 3:
Budget Development

2. Standards of Excellence
Organizations plan based on reliable
statistics from historical performance, while
maintaining a strategic look to the future
Key Indicators:
▪ Key organizational decision-makers are involved
▪ Budgets reflect relevant historical financial data and
organization’s goals
▪ Budgets are developed at relevant levels
▪ Cash flow monitoring instruments are developed and used
Financial
Planning
2

3. Budget Calendar
July Aug Sept Oct Nov Dec Jan Mar Apr May June
Begin budget development
process
Assemble draft budget by
compiling departmental budgets
Present draft organization
budget to Finance Committee
Finance Committee presents
budget to Board
Board approves FY10/11
budget
Develop program goals
Identify revenue streams
Identify expenses
Capture assumptions in budget template
Review and
negotiate
Review and
negotiate
Feb
Review and
negotiate
ED’s review &
negotiation
Board sets FY 09/10
organization's goals
Board receives FY 08/09
audited financial
statements
Board approves FY09/10
budget modification
Present Q4 results to
management
Review operating results to
create “Budget Narrative”
Evaluate program goals
Monitor revenue streams
Manage expenses
Develop departmental
budget teams
Budget Development and Monitoring Calendar
(June 30th
Year‐End)
2009 2010
ED’s review &
negotiation
Chief Financial Officer
3
Board
Senior Management
Team
Finance Committee
Legend
Executive Director

4. Themes Throughout the Budget Process
4
▪ What’s the story?
▪ What are the options?
▪ What are the trade-offs?
▪ What impact does that have on the bottom line?

5. Developing the Budget Narrative
5
▪ Elements of the Budget Narrative -
▪ Section 1: Telling the “Big Picture” story
▪ Section 2:
▪ a) Presenting financial statements & key data
▪ b) Explaining financial reports & data
▪ c) Present opportunities and concerns for the
current fiscal year
▪ Section 3: Provide insight into the longer term

6. Developing the Budget Narrative cont’d
PURPOSE: The primary purpose of the Budget Narrative Tool is to encourage a forum for discussion and decision making related to the
organization’s strategic financial direction and goals. The formulation of the Big Picture is based on the analysis of the organization’s financial
statements and relevant financial data.
STRUCTURE OF THE BUDGET NARRATIVE
Section 1: Telling the “Big Picture” Story
The opening section of the Budget Narrative tells a story. The story line revolves around whether the organization is viable, sustainable, and
has a strategic business model which enables it to fulfill its programmatic mission. The positive story explains how success is expected to
continue. However, since not all story lines are bereft of drama, the realistic story explains the uncertainty of what could happen as well as
what financial decisions could, should, and will be made. Different than traditional novellas, the riveting ending focuses on whether an
organization can expect to meet its specific organizational financial goals.
The opening of the Budget Narrative is an important opportunity for the CEO and CFO to evaluate the organization’s overall financial
performance and present it in ways which best articulate and highlight their understanding and interpretation of the “Big Picture”.
The writer can approach the “Big Picture” from a number of different angles, including, but not limited to, a combination of the following.
a) Frame the organization’s budget narrative from in the perspective of time, telling the story in the context of the past with an eye to the
future. A five year historical chart tracking net income, total revenue, administrative costs, and/or net asset growth including
temporarily restricted net assets, paints a very informative picture.
b) Focus on a particular program or department whose success or failure is indicative of the fortunes of the entire organization as well
as the current year’s programmatic strategy.
c) Focus on the strategic plan, if one exists, or several strategic decisions the organization has recently made impacting the current and
future fiscal years. Explore the impact of the decisions which have been made and implemented as well as the expected impact of
those being considered.
d) Discuss the competitive environment in which the organization operates. Evaluate competitors and indicate how the organization has
responded to changing market forces.
e) Focus on critical organization decisions that are on the horizon. Discuss how these decisions relate to the “Big Picture”, present and
future.
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7. Developing the Budget Narrative cont’d
Section 2a: Presenting Financial Statements and Key Data
The section focuses on the financial data that supports the “Big Picture”. It presents what management considers the most important
numbers. These key numbers are usually found in the analysis of the following reports:
a) Unrestricted, Temporarily Restricted, and Permanently Restricted Fund Balances
o Estimate the impact of current year projections on end of year fund balances. These numbers should be compared to prior year
fund balances and trends should be noted.
o Unrestricted Net Assets may also include a Board restricted endowment.
o Temporarily Restricted Net Assets may be more of an estimate if based on projections.
b) Current Year Organizational Net Income (the bottom line)
o Provide financial statements, indicating whether the organization is running a surplus or deficit.
o Compare projections for the fiscal year to the budget.
o Variance analysis to previous fiscal years may be useful.
c) Financial reports identifying profit and loss for specific projects and departments
o Reports include administrative departments and fundraising, and the sum of department results roll into organization totals.
o Identify areas of significant growth or decline.
d) Financial reports outlining financial models in current fiscal year and beyond
o Some indication of future financial position or whether the business model will hold is often necessary. Early in the fiscal year, a
listing of revenues may be a good indicator of the success of the future year. Later in the fiscal year, a financial report resembling
a net income budget or forecast might be more appropriate. This may also require putting together a financial model, describing
what would need to happen in order to get to the desired financial result.
e) Reconciliation to the Audited Financial Reports
o Issues of timing or one time entries (i.e. balance sheet clean-up) are not always included in the financial reports to the Finance
Committee. If this is the case, then additional reporting tracking potential one-time entries and their impact on the fiscal year can
explain differences between fiscal year projections and audited financial reports.
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8. Developing the Budget Narrative cont’d
Section 2b: Explaining the Financial Reports and Data
Build a bridge between the numbers reported on the financial statements and the organization’s programmatic and operating results. Guide
the reader through some or all of the following questions:
a) What do the numbers mean?
b) What are the variances between the budget, forecast, and previous fiscal year operating results?
c) What is the organization doing differently, what changes have been made, and have these changes “worked”?
d) Are their unanticipated factors or changes which are to the organization’s benefit or detriment?
e) What analysis did the Finance department undertake to better explain why things happen? For example, did management take a
closer look at the bottom line results of performance based contracts, administrative expense vs. indirect cost rates, diversity of
funding sources, aged accounts receivable balances, temporarily restricted net asset balances, etc.?
f) How will the strategic plan, or specific projects or departments be instrumental to the organization’s success going forward?
Section 2c: Present Opportunities and Concerns for the Current Fiscal Year
Connect last fiscal year’s results with plans for the current fiscal year. Discuss the opportunities and concerns for the upcoming fiscal year that
will impact the organization’s financial reality. Contingency plans to be determined or are at various stages of implementation should be
discussed.
a) Outline the opportunities and their significance not included in the budget or forecast.. What is the probability of such occurrences?
b) What are the organizational financial concerns not included in the budget or forecast? What could go wrong?
c) What changes or decisions (strategic, staffing, focus, investment, etc.) could be made to provide new programmatic opportunities
and relevant revenue streams
d) What expense reductions might alter the net income equation? What are their pecuniary and non-pecuniary impacts? This could be a
list of contingencies to enact if the financial situations worsens or does not improve. Would significant cuts compromise organizational
efficiency?
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9. Developing the Budget Narrative cont’d
Section 3: Provide Insight into the Longer Term
In concluding the budget narrative, indicate whether the current business model will sustain a financially viable organization. Reiterate
management’s evaluation of the strength or weakness of the organization financial position. Potential questions to explore at the end of the
story may include:
a) What are the projections for next fiscal year’s revenues, expense, and bottom line?
b) Are there decisions that can be made now (pricing, cost reductions, investment, etc.) that will impact the future? What is the financial
impact of non-recurring investment in planning, programs, staff and administration into future years?
c) What needs to happen for the business model to hold up in the long term?
d) Are there obstacles to business model success, internal and external? These might include: competition, macro economic
uncertainties, trends among funders, rising costs, the anticipated loss of programs, etc.
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10. Developing the Budget Narrative:
Year 5
Year 4
Year 3
Year 2
Year 1
How ending balances become next year’s starting position
July
Start of
January
OctoberApril
New Fiscal Year August
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September
DecemberFebruary
March
November
May
June

11. Developing the Budget Narrative:
How ending balances over time become organizational trends
Year 3
Year 2
Year 1
11
Year 4
Year 5

12. 12
What are the Options? - Revenues
Program/
Department
Funding Source
Total Revenue
Originally
Anticipated
Likelihood of
Receipt (%)
Total Revenue
After
Discounting Gap Notes on Impact of Funding Decrease
Program A
Government contract A 70,000 50% 35,000 May mean a decrease in number of meals served
to seniors, a core program service
-
-
-
-
-
-
Subtotal $ 70,000 $ 35,000 $ 35,000
Program B
Grant from foundation A 50,000 75% 37,500 Could mean a significant reduction in number of
children served in after-school program
Grant from foundation B 10,000 25% 2,500
-
-
-
-
-
Subtotal $ 60,000 $ 40,000 $ 20,000
Development
Special event ticket sales 113,000 50% 56,500 Less unrestricted funding to support under-funded
gov't contracts may mean cutting program services
-
-
-
-
-
-
Subtotal $ 113,000 $ 56,500 $ 56,500
Management&
General
Board donations 100,000 75% 75,000 Less unrestricted funding for M&G activities may
necessitate reducing capacity in ITor finance units
Investment income 40,000 0% -
-
-
-
-
-
Subtotal $ 140,000 $ 75,000 $ 65,000
Total Revenue $ 383,000 $206,500 $176,500

13. 13
What are the Options? - Expenses
Program/
Size of
Revenue Gap
Description of Proposed Cost
Impact to Delivery of Core Mission
Total Cost Remaining
Gap
Notes on Impact of
Proposed ReductionsDepartment (fromrevenue
worksheet)
Cutting Measure
Minimal Moderate Significant
Savings
Program A
Decrease # of meals served in Senior Center 6,500 Decrease in provision of coreservice
Delayhiring of Program Assistant for 6 months 20,000 No impact to mission -- will increase
workload for current staff in the interimFringesavings 4,000
Renegotiate contract w/ program supplies vendor 2,000 No negative impact
Subtotal $ 35,000 $ 26,000 $ 6,500 $ - $ 32,500 $ 2,500
Program B
Eliminate counseling program for children Critical reduction in provision ofcore
mission service for after-school
program participants
Salary of part-timeProgram Counselor 28,000
Supplies for counseling program 3,500
Subtotal $ 20,000 $ - $ - $ 31,500 $ 31,500 $ (11,500)
Development
Eliminate Development Associate position 50,000 May reduce ability to raise future
revenue
Fringesavings 6,500
Subtotal $ 56,500 $ - $ 56,500 $ - $ 56,500 $ -
Management
& General
Postpone the hiring of ITassistant 40,000 No mission impact --will increase
workload for IT staff in the interim
Fringesavings 8,000
Increase employee contribution to med. insurance 8,000 may impact staffmorale
Subtotal $ 65,000 $ 56,000 $ - $ - $ 56,000 $ 9,000
Total $ 176,500 $82,000 $63,000 $31,500 $176,500 $ -

14. What are the Trade-offs? – Making the
Hard Choices
14
ProgramA ProgramB Development
Management
&
Administratio
n
Total
Total Anticipated Revenue Gap (35,000) (20,000) (56,500) (65,000) (176,500)
ProposedExpense Reductions:Minimal Impact (26,000) - - (56,000) (82,000)
Subtotal: Remaining Gap (9,000) (20,000) (56,500) (9,000) (94,500)
ProposedExpense Reductions:Moderate Impact (6,500) - (56,500) - (63,000)
Subtotal: Remaining Gap (2,500) (20,000) - (9,000) (31,500)
ProposedExpense Reductions:Significant Impact - (31,500) - - (31,500)
Subtotal: Remaining Gap (2,500) 11,500 - (9,000) -
Total Proposed Expense Reductions (32,500) (31,500) (56,500) (56,000) (176,500)
TOTALREVISEDSURPLUS(GAP) (2,500) 11,500 - (9,000) -

15. The Budget Development Steps
▪Step 1: Assemble materials & determine goals
▪ Step 2: Determine programs & activities
▪ Step 3: Identify significant support functions
▪ Step 4: Budget expenses
▪ Step 5: Budget revenues
▪Step 6: Identifying the Unknowns
Get it done!
15

16. Step 1: Assemble Materials
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▪ Last full year’s budget
▪ Last full year’s actual revenue and spending
history
▪ Current year’s budget
▪ Current year-to-date’s actual revenue and
spending
▪ Forecast of current year’s ending balances
▪ Develop the organization’s Budget Narrative

17. Step 1: Assemble Materials cont’d
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▪ Collect and review data:
▪ How did the organization perform?
▪ Budget surplus / deficit
▪ Increasing / decreasing reserves:
▪ Unrestricted net assets
▪ Temporarily restricted net assets
▪ Permanently restricted net assets
▪ Last year
▪ Last 3 years
▪ What trends are developing?

18. Step 1: Assemble Materials & Determine
Goals
▪ Will the organization’s business model meet the goals for:
▪ Finance
▪ Program
▪ Administration
▪ Stakeholders
▪ Mission
▪ Fixed Assets
▪ Strategic Planning
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19. Step 1: Assemble Materials & Determine
Goals cont’d
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▪ What are the organization’s:
▪ Reserves?
▪ Goals for developing reserves?
▪ How do we translate those goals into budget
priorities?

20. Step 2: Determine Programs & Activities
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▪ Assemble the budget development team
▪ A role for any lead officer is to test all
assumptions and gather data from as many
sources as possible
▪ Gather information from sources closest to the
point of delivery

21. Step 2: Determine Programs & Activities cont’d
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▪ Core Programs
▪ Program activities
▪ Resources required
▪ Anticipated Programs & Activities
▪ Additional resources required

22. Step 2: Determine Programs & Activities cont’d
Agreed
Budget
Priorities
22

23. Step 3: Identify Significant Functions
23
▪ Changes to necessary support functions
▪ Do you now need a dedicated HR resource?
▪ Do you now need a dedicated IT resource?
▪ Do you need to start or expand a grant management
function and/or a Development function?
▪ Do you need to lease more space, add maintenance
staff, or outsource maintenance support?
▪ How do changes to program capacity affect the
allocated amounts?

24. Step 4: Budgeting for Expenses
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▪ Develop a program-based budget template
▪ Require each budget development team to
submit a completed budget submission
▪ Develop a consolidated budget of all the plans
▪ Decide if the consolidated budget achieves the
Budget Narrative priorities
▪ Renegotiate budget submissions

25. Step 4: Budgeting for Expenses cont’d
Expenses generally fall into one of two categories
▪ Personnel Services (PS)
▪ Other Than Personnel Services (OTPS)
PS
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OTPS

26. Step 4: Budgeting for Expenses cont’d
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▪ Salaries
▪ Fringe Benefits
▪ Payroll Taxes
▪ FICA / Medicare
▪ State Unemployment Insurance (SUI)
▪ Mandatory Insurance
▪ Workmen’s Compensation
▪ Disability
▪ Voluntary Insurance
▪ Health Insurance
▪ Long-Term Disability
▪ Pension - 403(b) or 401(k) (voluntary)

27. Step 4: Budgeting for Expenses cont’d
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▪ Full Time Employees
▪ Mandatory taxes and insurances, medical plan for
employee only
18% to 23%
▪ Mandatory taxes and insurances, medical plan for
employee only, pension funding of 5%
23% to 28%
▪ Part Time Employees
▪ Mandatory taxes and insurances, does not qualify for
medical plan or any other voluntary benefit plan
10% to 13%

28. Step 4: Budgeting for Expenses cont’d
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▪ Space
▪ Supplies
▪ Printing/copying
▪ Transportation
▪ Insurance
▪ Depreciation

29. Step 4: Allocation of Expenses
29
▪ Salaries
▪ Time sheets
▪ Time studies
▪ Employee attestation
statement
▪ Fringe benefits
▪ Salary dollars
▪ Headcount (F.T.E.)
▪ OTPS
▪ Salary dollars
▪ Headcount (F.T.E.)
▪ Square footage
▪ Facilities use studies
▪ Indirect Cost Rate

30. Step 5: Budgeting for Revenues
30
▪ Myths
▪ We can’t afford to create a reserve
▪ My board wants a “balanced budget”
▪ Funders don’t want to see a “surplus”
▪ Reality
▪ Aim to add to reserves each year
▪ An unrestricted reserve is crucial
▪ Most funders want the organizations they support to be
financially secure

31. Step 5: Budgeting for Revenues cont’d
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▪ Grants
▪ TRNA balance from pervious year(s)
▪ Grants and contracts
▪ Individual donations/Membership/Annual fund
▪ Special events
▪ Program service fees
▪ Other revenues
▪ Endowment allocation/Investment
▪ Earned Income
▪ Unrelated Business Income

32. Step 5: Budgeting for Revenues cont’d
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▪ Justification for deficit spending:
▪ The deficit is for a specific purpose and there is a reliable
plan to earn the funds in a future period
▪ The organization can fund the deficit from their reserves
▪ Each organization needs to determine the method and amount
of its contribution to reserves
▪ % of excess of revenue over expenses
▪ % of operating budget
▪ % of revenues
▪ % of earned income
▪ Accounting for revenue uncertainty/discounting

33. Step 6: Plan for Identifying the Unknowns
▪ What if….
▪ Revenue changes?
▪ Expenses change?
▪ What can we do to respond to the unknowns?
▪ Contingencies plan
▪ Opportunities tracking
▪ Develop strategy
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34. Financial Monitoring & Analysis: Session 4
What are the
operating results
telling us about the
organization’s
business model?
Key Indicator:
Trend in
Unrestricted Net
Assets
How current performance affects the future
June 30th
Year-end
Year 6
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