Summer has only just ended, and if you have a December 31st year-end like many associations your 2017 budget may be the furthest thing from your mind. But, now is the time to start building your plan for the coming year.
The association budget encompasses all aspects of the association’s activities from programs like mentorships and conferences to administration, like postage and couriers. Having a solid understanding of your revenues and expenses will allow board members to make educated decisions to maintain your association’s financial well-being and growth.
Where to start
A good place to start when doing the first draft budget is reviewing current and prior year financials. A good practice is to review financials monthly, including a comparison of budget to actual income statement. This will allow the board to receive timely feedback on the association’s performance. Reviewing what has happened and what is currently happening helps the board make better predictions about what will happen.
Crunching the numbers
There are two main ways to approach the budget.
- Zero-based budgeting – this method assumes each budget line is zero and the amount needs to be justified. Going through each line on the budget and justifying every revenue and expense can be time consuming, however for a not-for-profit where budgets are smaller it can be a worthwhile exercise. It can identify inefficiencies and potential cost savings and encourages conversation about revenue streams and spending.
- Incremental budgeting – this method begins with last year’s budget or actuals and makes incremental adjustments. These increments are usually based inflation or a set amount. This method is quick and easy to understand and prepare. Disadvantages of incremental budgeting are that it does not challenge the status quo which can lead to wasteful spending and lack of resources for new opportunities.
Both methods have benefits and drawbacks and what works for one association may not be appropriate for another. If time is a constraint, then use incremental budgeting. As long as every few years, perhaps when reviewing your association’s strategic plan, each budget line is evaluated.
Stay tuned for the Part 2 of our Association Budget series where we look at common mistakes made during the budgeting process and things to consider when setting your budget.
Post authored by Michelle Prior.