$20 for food.
$10 for technology.
Which leaves…$150 for me!
If only budget creation were as simple as playing with Monopoly money. However, I’m the guy in Monopoly who buys hotels on Park Place but has zero cash in my bank.
While Monopoly money won’t actually buy you anything in real life, a well-constructed budget can make or break your organization.
Budgets are like ice cream shops. There are 32 different flavors, but the ingredients are mostly the same, with a few adjustments to make them different. In this post, I’m giving you a simple but solid budget that you can use to gain clarity on the upcoming year.
And no, I’m sorry, but building a money tree or finding a gold pot at the end of a rainbow is not part of this process.
I experienced the dangers of a poor budget several years ago when I joined the board of a nonprofit. As the newest member, I had a steep learning curve to catch up with everyone else. After every board meeting, the group ate dinner at fancy New York City restaurants. The drinks prices were obnoxious, as if the food cost wasn’t high enough. When the bill finally arrived at the table, I would try to sneak a peek because I knew it must have been nearly $200 per person.
Because we had our board meetings every month, these dinners would also happen monthly. My first reaction was shock at how much money we were spending on dinner for just the board, but then my second reaction was that the organization must be rolling in cash to afford these types of dinners.
Fast-forward one year, when a new president was elected, and the board turned over. Guess what the new president found? The organization was massively in debt! This meant we were spending way more money than we were bringing in in revenue. The Michelin star dinners were the first to get cut from the new budget. It turns out the prior president was operating without a budget.
Running an organization without a budget is like going to a grocery store hungry without a shopping list. You will end up with a cart full of snacks and a bank account that looks surprisingly empty. A budget is your financial compass, ensuring you don’t stray too far from your fiscal path.
First, we must be clear on a couple of terms to create a simple budget for your organization.
Understanding The Basics
Revenue – this is all the money that comes into your organization. This money can come from membership fees, product sales, or donations. Revenue is the exciting part; it’s the ‘cha-ching’ sound your organization loves. It’s like opening gifts on your birthday.
Expenses – this is all the money that you spend to keep your organization going. Expenses can be anything from software subscriptions, travel, salaries, and advertisement. Expenses are like the cleanup after your birthday party – necessary but not nearly as fun.
Net profit – when you take your revenue and subtract your expenses, you get your net profit. Nonprofit organizations will want their net profit to be zero, whereas for-profit organizations try to be above zero.
Now that we are clear on the terms, we must do one more thing before creating the new budget.
Prior Year Budgets
If your organization has been around for a while, you likely have prior budgets that you can examine. These prior budgets are extremely helpful in assessing realistic projections for the future. As the saying goes, past behavior is a strong indicator of future behavior.
If your past revenue has grown by 10% over the last three years, we can assume the same thing will happen this year. On the expenses side, you can predict where and how much money you’ll spend in the various expense categories by looking at prior years.
This is a great place to begin the new year if you have these documents. However, if you don’t have these documents, don’t worry; you’re still going to be OK; it just means that we have to ask our magic eight ball for the answer. Just kidding, it means we’ll have to make some educated guesses for revenue and expenses.
The basic structure of a budget has three parts: revenue, expenses, and net profit.
Knowing these three parts, you only need a simple spreadsheet to create your budget structure. The top section of the spreadsheet shows your revenue, the middle section shows your expenses, and the bottom section shows your net profit. Once you create this basic structure in a spreadsheet, it’s time to fill in some real information!
Start with your revenue, also known as income sources.
Show me the money! Where is your cash coming from?
When you look ahead to the year, where is your money coming from? This can be Membership fees, donations, grants, t-shirt sales, or even bake sales. Think of all the possible places that money will come into your organization throughout the year. And no, finding a pot of gold at the end of the rainbow is not a legitimate money source.
This list will be minimal for some of you because money will only come from one place. However, other organizations might have money coming from many different sources.
On your budget spreadsheet, put each revenue source on its own row in the revenue section. Then, in the next column, calculate how much revenue you think will come in for each revenue source throughout the following year. When you have this information inputted, you are now done with the revenue section of your spreadsheet.
I know talking about finances can be triggering for some people, so I want to take a moment to check in and see how you’re feeling. If this stresses you, take some deep breaths, watch my video on managing your state, drink some tea, think about bunnies, and then come back here because it’s time to move on to the expenses!
This is where you plan how to spend the organization’s money.
Expenses are part of budgeting, like checking your phone battery and realizing you’re at 2%. Suddenly, you’re prioritizing like, ‘Do I really need GPS to get home, or can I just wing it?’
Every industry has its own specific expense categories. For example, pet groomers might have an expense category just for Band-Aids because they get bitten often while brushing dogs. We have coffee, lots of coffee, because caffeine is our secret ingredient to creating as many videos as we do.
Instead of trying to predict your specific expense categories, let me give you the most common ones so you can continue creating this simple but solid budget.
The most common expense categories are:
Salaries and Wages: This includes the pay for all employees and any freelance or contract labor.
Rent and Utilities: If you have a physical location, these are your costs for space and keeping the lights on.
Office Supplies and Equipment: Pens and paper to computers and software.
Marketing and Advertising: This is what you spend to promote your organization, from social media ads to flyers.
Travel and Entertainment: Any costs associated with traveling for business or entertaining clients or donors.
Professional Services: Fees for lawyers, accountants, consultants, etc.
Insurance: Protecting your organization and its assets.
Miscellaneous: There’s always something that doesn’t quite fit into the other categories.
Now, just like with the revenue section, each expense category should go on its own line in the expense section of your spreadsheet. Next to each category, estimate how much you expect to spend in the upcoming year.
Be realistic and base your estimates on past expenses or your best educated guess. Remember, it’s better to overestimate the costs and be pleasantly surprised than to underestimate and end up in a financial pickle.
Net Profit Calculation
Once you’ve filled out both your revenue and expenses, it’s time to calculate your net profit. This is your total projected revenue minus your total projected expenses.
This number should ideally be close to zero for non-profits, as any surplus should be reinvested back into the organization. For-profit organizations, this number represents the profit you expect to make. If it’s a positive number, you feel like a genius, and you’ll order the fancy Champagne for your New Year’s Celebration.
If you end up with a negative number… Costco Champagne, here we come! Don’t panic! This is a sign that you need to either increase revenue or cut down on expenses.
Review and Adjust
Remember, your budget isn’t set in stone. It’s a living document that should be reviewed regularly. As the year progresses, you’ll likely need to make adjustments as actual revenues and expenses become clearer.
Regular reviews will help you stay on track and make informed decisions.
So there you have it. Creating a budget might not be as thrilling as spending Monopoly money, but it’s less risky than betting it all on Baltic Avenue, and it’s crucial for the health of your organization. Like a good map guides a traveler, a well-constructed budget guides an organization toward financial stability and success.
We’ve covered the basics of setting up a budget, from understanding key terms to filling out a simple template. The most important thing is to start. Once you have a budget, you’ll feel more in control of your organization’s financial future.
So, dive in, get your numbers together, and start building that budget. Remember, a journey of a thousand miles begins with a well-planned budget.
And hey, if you find that pot of gold, let me know, okay? Until next time, happy budgeting, and here’s to your organization’s financial health and success!