Budget management is a key criterion for measuring an organization’s success. Essentially, the financial budget specifies which projects an organization will undertake. Also, budgeting allows for the strategic distribution of cash within the organization.
- A good understanding of budgeting and the tools available can help a nonprofit maximize funds to achieve its organization’s objectives.
- Planning a budget for the future involves more than just deciding how much money to spend.
What is Budget Management?
Budget management is a fundamental business practice that focuses on regulating spending in proportion to a set budget. It entails a vast range of distinct processes carried out at various levels of organization.
A simple budget includes predicted income and expenses for a specific period (such as the future quarter or year). By subtracting expenses from predicted income, the remaining funds can be used to undertake projects and initiatives. This can help ensure that an organization does not overspend.
Likewise, budgets from prior periods can be compared to the organization’s actual financial allocation and performance. This provides insight into how closely estimates match real spending.
Benefits of Budget Management for Nonprofits
This section will highlight the importance of budget management for nonprofits and the impact of budgeting on organizations.
a. It serves as a roadmap
Firstly, a budget serves as a financial road map for the future, outlining how much money should be saved and spent on certain things. However, unpredictability is what characterizes an organization’s external environment. Uncontrollable events may alter priorities or affect a nonprofit’s revenue.
According to McKinsey, organizations can adopt zero-based budgeting which establishes the minimal resources required for an organization to survive, should the situation demand it. An agile attitude can help a nonprofit adapt and guide the organization through challenging times. Consequently, a budget can provide you with a plan.
b. It guarantees availability of resources
Essentially, the main purpose of budget management is to ensure that an organization has adequate resources to accomplish its objectives. This provides an effective way to identify areas to make savings and which teams and initiatives need extra resources by organizing finances ahead of time.
Budgeting ahead of time might help a nonprofit plan other expenses, such as hiring a new employee if the team needs to expand its efforts.
c. Budget management aids in project prioritization
Setting project and initiative priorities is a resultant effect of the budgeting process. Hence, when setting priorities, nonprofits can take into account each project’s possible return on investment, compatibility with a nonprofit principle, and potential impact on larger financial objectives.
In addition, it can be helpful to prioritize jobs and larger initiatives when you apply the value proposition budgeting method. This can help you ascertain and articulate the value of each line item to your organization.
d. Budget management can support internal goal-setting and reporting
Planning a budget for the future involves more than just deciding how much money to spend. It also involves estimating how much income is required to meet organizational objectives. Setting financial goals for the team and the entire business can be done through budgeting. This is especially important when activity-based budgeting is utilized.
Your budget allocations should be based on feasible financial goals, which should be the basis for all other budgetary decisions. This is determined by the costs required to achieve your goals. By adopting budget management, you can also review the goals for the upcoming period and inform staff of progress. By and large, monitoring your team’s progress—or lack thereof—enables you to make plans for future expansion.
Conclusion
Growing or new organizations frequently find it difficult to create an appropriate budget due to their inexperience in a certain market or sector. Even more, effective budget management can be challenging, particularly in a shaky economic climate. However, a good understanding of budgeting and the tools available can help a nonprofit maximize funds to achieve its organization’s objectives.
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