Ten Tips for Better Financial Planning

If bookkeeping is the bricks and mortar of your financial reporting system, then financial planning is the architecture; effective financial planning can better prepare your organization to respond whatever happens on a daily basis.

1. Failing to plan is planning to fail. It’s an old saw, but a good one! You wouldn’t start on a long trip without a road map and a destination; by the same token, you shouldn’t launch a new year of activities without a financial plan that lays out some sensible goals – and boundaries. That plan is your annual operating budget – a statement of your programs and activities in dollars and cents. The budget is your financial road map, a key operating document approved by your board as a current-year operating policy, defining and quantifying your targets for spending and raising money.
2. Put it in writing. Your plans will undoubtedly change as the year unfolds, and you respond to changing circumstances (a budget is an adaptable planning tool to help predict your future; financial statements are historical documents that record where you’ve been). However, keeping a clean copy of that initial budget is important! It serves as a yardstick for measuring your progress in fulfilling your plans – and your success at adapting them to your organization’s evolving situation. A written document provides a solid basis for comparing plans to results. It is also an excellent tool for sharing information amongst your organization’s leadership and staff.
3. Share responsibilities effectively among your staff, board and volunteers. What’s effective depends on the nature of your organization and the individuals involved. For some charities, financial planning is staff’s hands-on responsibility, with board members in a governance role, approving the results or requiring changes. In other charities, board members – e.g. the President or Treasurer – take an active role in planning. Some have a Finance Committee, where volunteers outside the board contribute to the process. Often, smaller organizations need more volunteer support, and larger ones delegate more responsibility to staff. Consider what will work best for your organization at this moment in its life cycle.
4. Identify and use all resources. Chances are, you recruited board members based on the skills, connections and support they could bring to your charity. Are your directors fulfilling those roles for your organization? If not, have you talked to them about stepping up to the plate? Consider, too, that your directors may be able to recruit colleagues or friends to provide pro bono support for specific needs. If your organization has an annual financial audit, don’t forget to use your auditor for accounting, planning and tax compliance advice. Your banker, broker, government funding officer and others should be able to contribute planning advice on trends and opportunities for your organization.
5. Think about how to share financial information. Personal data such as staff compensation must, of course, be treated with care. More broadly, though, it is important to think about who needs to know about your charity’s financial situation, and at what level of detail. You wouldn’t want staff or volunteers to be worrying needlessly.But, if you need their input, you must provide enough information for them to offer an informed opinion. You can share financial data in a controlled way by preparing mini-statements by program or activity, as well as a complete operating statement. You can also prepare both detailed and summary (“high-level”) financial statements, to be disclosed depending on people’s level of engagement with the challenges at hand.
6. Secure board buy-in to your plans. A charity’s board of directors is legally responsible for the organization. In situations where staff are front and centre in terms of running the show, board members may become complacent – but they are still on the hook! Staff should ensure that board members receive – and read – and understand – budgets, cashflow projections, financial statements and other key financial planning documents. It’s important to be clear with your directors where the risks lie in your plans for the year. If those plans go awry, you need them to stand behind you and back you up. The organization’s financial plans must be the board’s plans too.
7. Secure staff buy-in to your plans. Staff are instrumental in carrying out the plans for the year. The more they feel ownership of the targets set for their position or their department, the more invested they’ll be in achieving those goals. If belt-tightening is in order, you need your staff, especially those in leadership, purchasing and revenue generation roles, to be fully on board with whatever needs to be done. Develop appropriate ways to bring them into the process of brainstorming, generating options, and making decisions.
8. Follow an annual planning agenda. If an organization is very project-driven, each year may be quite different from last year and next. However, many organizations have a well-understood annual routine. In these cases, financial planning should also follow a well-defined pattern where the tasks associated with creating, reviewing and adjusting plans happen in the same order, within about the same time frame, with the same participants each year. A written annual planning agenda (for instance, setting out key tasks by month) can be used to ensure staff and board understand what will be expected from them. Your planning calendar will also help you identify and meet external reporting deadlines, e.g. funding applications and tax returns.
9. Create time for planning. Make sure your work schedule allows time to read and analyse financial reports, think about the implications, consider your options and prepare well-researched plans for your programs and overall operations. This is even more important for Board members who meet intermittently; get the financial statements to them before they need to act on them. The worst decisions are often the ones made under pressure in the midst of a crisis. If you’ve invested time in contingency planning – anticipating problems and brainstorming “what-ifs” and possible responses – you will be much better prepared to give a measured response and a sound decision.
10. Take the long view. “Now” always seems to be the imperative. Staying on top of today’s demands can take all your time. However, this year is just one more milestone in your organization’s life. You need to consider this year’s plans in context with medium- and longer-term objectives. This year’s operating budget carries through from last year’s results, and it should help your charity achieve its plans for the future. Situating each year’s budget within a multi-year strategic plan is an excellent way to anchor your financial planning.

This tip sheet was created by Heather Young of Young Associates. Founded in 1993, Young Associates provides bookkeeping and financial management services in the charitable sector, focused on arts and culture. Young Associates also provides consulting services in the areas of data management, business planning and strategic planning. Heather Young published Finance for the Arts in Canada (2005), a textbook and self-study guide on accounting and financial management for not-for-profit arts organizations.

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Ten Tips for Drafting Your Annual Budget

Your annual operating budget is a key management and planning document approved by your board as a current-year operating policy. By defining and quantifying your financial targets, it provides a financial road map that can help you successfully navigate your cycle of programs, services, events and other activities. Creating a detailed plan, grounded in reality, is an essential first step to effective financial management.

1. Format can support you. Treat your budget as part of a broader financial management effort, which embraces your accounting system, external reports (e.g. grants, taxation) and management reporting needs. Your budget categories should align with your accounts, and with the funding and tax forms that you need to complete. This integrates planning with records-keeping, and helps the bookkeeper, managers and board to speak the same financial language. Create a spreadsheet template and use it year over year. Base your financial report spreadsheets on the same template. Consistent formatting makes it easier to share documents and coordinate amongst staff, volunteers and board.
2. A conservative approach: start from revenues. Here’s a good piece of advice – don’t spend money that you don’t have! If you start your budget process by thinking carefully about how much revenue you are likely to generate, you are less likely to “bluesky” your way through the expense lines and wind up with a deficit on the bottom line. This method is particularly effective for organizations with only a few years of history under their belts. Your past revenue achievements are likely to point to what you can reliably predict for this year, giving you reasonable boundaries for planning your expenditures.
3. Testing a new idea: start from expenses. What if you’re launching a big new project? In this case, it’s important to consider what investment it would take to make your new activity a success. You may need to work your way through the expense lines first, and then think about how you will cover your costs.
4. Start from knowns and work towards estimates. On both the revenue and expense sides of your budget, you will know more about some lines than others. For instance, you might have confirmed multi-year funding that you can slot into revenue lines, and leases, union agreements and employment contracts that you can plug into expense lines. At the other end of the scale, the forecasts for some lines may amount to educated guesses, based on past history and current circumstances. If you fill in the knowns first, you create a context that can support the process of estimating other figures.
5. Start from last year’s actual results. Past accounting data can have strong predictive value. If this year’s operations are going to be similar to last year’s, and your charity’s circumstances haven’t changed significantly, then it can be effective to base your budget on previous actuals and adjust as needed for your evolving situation.
6. Use reasonability calculations where appropriate. This technique breaks your budget estimate down into its components, and helps you think things through at a higher level of detail. For example, I could ballpark my advertising expense, or I could break it down to X ads times Y price. Similarly, I could break down my part-time staff expense to X individuals, times Y hours per week, times Z rate of pay. Not all budget items lend themselves to this treatment: categories that are catch-alls for numerous items, such as office supplies, may call for a ballpark figure.
7. Research. Base your budget estimates on research where you can. “Hard” research may take you to catalogues, websites and quotes from suppliers. “Soft” research, such as advice from colleagues, can help you to develop sound options and to learn from others’ experience.
8. Use building blocks. You can build your operating budget from smaller components by developing separate budgets for each program or activity. These add up to your plan for the year. To them, you will need to add an overhead budget, including administration and any other items that can’t readily be broken by activity (e.g. insurance, fire and security). This technique lends itself to a decentralized approach, where every program manager develops their own budget, and the executive director assembles the building blocks, and negotiates any changes required to make the operating budget work.
9. Make an environmental scan. Charities can be highly vulnerable to changes in their environment. Donation and grant revenue is sensitive to economic circumstances, personal taxation and local labour market conditions. Political change can bring some issues to the foreground and back-burner others, and affect the availability of government support. Tax and regulatory changes can affect your expense picture. Stay in touch with the news, and consider how the changing environment may impact your budget forecasts. Remember, your bookkeeper should be a source of up to date details.
10. Don’t idealize. And don’t catastrophize either. It can happen that everything goes your way – or goes against you – but more often things are somewhere in the middle. In particular, don’t get hooked on a wonderful idea and assume that everything will fall in line to support your vision. Develop best-case and worst-case scenarios, then settle on an estimate somewhere in between, based on your assessment of what the contingencies might be.

This tip sheet was created by Heather Young of Young Associates. Founded in 1993, Young Associates provides bookkeeping and financial management services in the charitable sector, focused on arts and culture. Young Associates also provides consulting services in the areas of data management, business planning and strategic planning. Heather Young published Finance for the Arts in Canada (2005), a textbook and self-study guide on accounting and financial management for not-for-profit arts organizations.

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Ten Tips for Analysing Your Organization’s Balance Sheet

Understanding your organization’s financial statements is essential to controlling the purse strings. These ten tips are intended to help you better assess and interpret your Balance Sheet – a.k.a. Statement of Financial Position, or Statement of Fund Balances.

The balance sheet captures the value of your assets (things you own), liabilities (what you owe) and net assets (difference between assets and liabilities). This statement shows your organization’s financial position at a single moment in time. (The next moment, things may change – every deposit and withdrawal changes the balance sheet.) The balance sheet is often more challenging to interpret than its companion, the statement of operations. However, grasping it is essential to understanding your charity’s finances.

1. Understand your financial documents. Formal financial statements (including those prepared by professional accountants and those generated by commercial software programs) are designed to be understandable by people who’ve made a reasonable effort to learn how to read them. It’s worth taking the time to become familiar with the layout and terminology. Read your balance sheet regularly. The more familiar you are with your organization’s reports, the better you’ll become at spotting good news and bad news, and knowing how to address potential problems.
2. Balance sheet accounts are “permanent.” These account balances roll on from year to year. Last year’s closing balances become this year’s opening balances. In contrast, revenue and expense accounts (found on your operating statement) start at zero each fiscal year, accumulate a full year of results, and are “re-set” to zero for the new year. That is, your operating statement shows only current year activity. When you read the balance sheet, you need to be able to interpret what’s current and what’s historical. Transactions stay on the balance sheet until they are settled. Thus, last year’s unpaid bills will sit in Accounts Payable until you use this year’s income to pay them off.
3. Understand how day to day operations affect the balance sheet. The Balance Sheet shows your organization’s “lifetime” result – the accumulated surplus or deficit – in the Net Assets section. This year’s revenues contribute to an accumulated surplus or deficit, and this year’s expenses reduce it. If this year is going well from a financial viewpoint, then quite likely your operating results are increasing your assets, decreasing your liabilities, and increasing your net assets. The opposite is also true. You need both statements to understand your situation fully. (NB: see also “Ten Tips for Analysing Your Organization’s Operating Statement.”)
4. Go beyond the cash account. Yes, most of your transactions probably go through the bank as cheques and deposits. It’s tempting to read the operating statement and the bank balance, and feel that you’ve gone as far as you need to go. However, you need to look at all balance sheet accounts to understand your resources and obligations. Some accounts contain transactions in progress, e.g. Accounts Receivable (we’ve sold goods or services but the client has not yet paid) and Accounts Payable (we’ve purchased goods or services but we have not yet paid). Receivables appear in your revenue accounts – but you haven’t yet got your money. Payables appear in your expense accounts – but you haven’t yet paid for them. These items haven’t hit the bank yet – but they will – and you need to know what to expect. These are just a couple of typical examples. Make sure you understand all of your charity’s particular balance sheet categories.
5. “Current” has an accounting meaning. Anything “current” pertains to items that are cash or will be converted to cash within this fiscal year. (See the next two bullet points for fuller explanations.) Anything not designated “current” has a longer timeline. Thus, long-term liabilities don’t need to be settled this fiscal year (e.g. if you have a mortgage, this year’s payments are a current liability, and the rest is a long-term liability). Capital assets are items of substantial value that are owned for longer than a year.
6. Current assets = short-term resources. The #1 current asset is cash – in the bank, in short-term investments, in your petty cash box. Other current assets are considered “near-cash” in that they will be realized for cash within the year. You need to know what you’ve got here. If people owe you money (Accounts Receivable) – who, how much, and how quickly can you collect? If you’ve paid for something in advance of receiving it (Prepaid Expense – e.g. a rent deposit for a special event), when will you get the value of it? These are typical current assets. Your charity may have other categories – all of which represent financial resources to you.
7. Current liabilities = short-term obligations. These are debts that must be paid within the year. If you owe money to others (Accounts Payable) – to whom, how much, when are the obligations due, and how will you meet them? If you have received money in advance (Deferred Revenue – e.g. a grant or sponsorship for next year, received early), will you have enough cash to carry out the obligation when it falls due? These are typical current liabilities. Your charity may have other categories – all of which represent obligations that must be met.
8. Working capital = current assets minus current liabilities. This figure defines your ability to carry on in the short term. If current assets exceed current liabilities, you’re doing well! You have more than you need to meet short-term obligations – as long as your near-cash items become cash before your debts are due. If your current liabilities are greater, you may be facing financial challenges. Calculating working capital and understanding the details behind your balance sheet figures are key to assessing what kind of shape you’re in.
9. Capital assets and depreciation (amortization) policy affect your financial position. A capital asset is an item of value that your charity will own for more than a year. Typical examples include buildings, land and equipment. Depreciation (amortization) is an accounting mechanism that allows you to spread the cost of an asset over the estimated years of ownership. (It’s tempting to think that depreciation equals the decline in an asset’s value over time. This might be true – but often it isn’t. For example, many companies depreciate computers over a three-year period. Do you think your $1000 computer would fetch $666 if you tried to sell it after owning it for a year?) Depreciation is an estimate, pure and simple. Choosing a longer depreciation period versus a shorter one affects your financial position – and your operating statement. For instance, if I depreciate my $1000 computer over three years, each year bears $333 of expense. If I depreciated it over two years, each year would bear $500 of expense. If I used a four-year depreciation period, each year would bear $250 of expense. How many years will I get out of the computer? Impossible to know ahead of time. This is a fairly complicated topic – beyond the scope of this tip sheet – and a good one to explore with your chartered accountant.
10. Compare deferred revenue to current assets. It’s fairly common for charities to have deferred revenue: e.g. grants and sponsorships intended for next year but received early; the unspent portion of a multi-year grant; subscription sales for next season. If you’re in good financial shape, your deferred revenue will be sitting in the bank, or in short-term investments. If your cash balances are less than your deferred revenue, it means that you’ve already spent that money on immediate needs. Comparing deferred revenue to your cash accounts will tell you quickly about your ability to meet this category of obligation.

This tip sheet was created by Heather Young of Young Associates. Founded in 1993, Young Associates provides bookkeeping and financial management services in the charitable sector, focused on arts and culture. Young Associates also provides consulting services in the areas of data management, business planning and strategic planning. Heather Young published Finance for the Arts in Canada (2005), a textbook and self-study guide on accounting and financial management for not-for-profit arts organizations.

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