In working with churches and their accounting systems, which involves budgeting, I see a lot of focus around budgets instead of the standard financial accounting reports approved by FASB (Financial Accounting Standard Board). While budgets are good tools, nonprofits must understand they are only a tool and don’t replace common sense understanding of financial statements.
Budgets don’t tell the organizations if it’s financially healthy or if they can embark on a new project or mission. Furthermore, when your audited, budgets are not even looked at, but in many instances have the most time devoted to them by staff or volunteers. Auditors want to know the revenue that came in and what you actually spent the money on – not what was projected. 🙂 From the perspective of auditing and organizational financial health, the budget which has the most time dedicated to it, has very little if any importance. It would appear that financial statements that show what actually happened is more important, but less time is devoted in understanding them.
If I could make an analogy here about budgets and what they have become to many organizations – not just non-profits. Budgets are treated like a storage tank for each line item. For example, at the start of the fiscal year, this storage tank gets filled up with all the money for each line item so each ministry has their allotted money for the year. There’s one enormous problem with this thought process. The organization hasn’t collected the money to fill the tanks up yet. Because the organization is just starting its fiscal year and needs donations to fill the tanks, the ministries can’t assume they have the money because the budget says so. The tanks get filled as the year progresses and donations come into the organization, not on the first day of the fiscal year.
Stay tuned for the second part in this three-part series. We will discuss some budget assumptions that can really turn things upside down.