As I write this blog I find myself second guessing the title. Should the word “Practical” be replaced by “Realistic”? Personally, I view “Practical” as meaning more sensible or useful. “Realistic” is pretty literal….. what is actually going on? During budget preparation and management you never want to lose sight of the real world and what is actually happening within your organization’s financial activities. Both practicality and realism play a critical role in your organization’s survival.
- Grants/contracts from a funding source for a pre-determined amount;
- Performance based activities where you have the possibility to make, or lose, money based on the programs performance and billing capacity.
Let’s talk about the budgeting process for both of these revenue types.
Budget preparation for a grant/contract situation may seem like a pretty simple exercise. If you have a grant for 1.2 million dollars, your tendency may be to prepare a program budget for 1.2 million dollars. That is only realistic if it costs you exactly 1.2 million dollars to run that program. Chances are that is not the case. When you are preparing your budget you need to approach this with the realistic eye of what it costs to run this program.
I realize that in a grant/contract situation you most likely do not have the capability to request more money from the funding source should you run in a deficit situation, but that deficit needs to be reflected in your budgeting process. Once you have accounted for your program costs, if the total expenses equal 1.3 million dollars for a 1.2 million dollar program that means you have a realistic budget. The deficit is an operational problem, not a budget creation problem.
Fee for services programs, or any activities where you have the capability of making (or losing) money, needs to have the same realism applied. You can get a little more creative in your projections here due to the absence of some funding source restraints, but you still have to be realistic in your projections. In fact, the “real world approach” may be even more critical in preparing this type of program budget. In a lot of cases, the fee for service programs are the ones that are used to cover the deficits for a grant/contract situation.
Sound budgeting practices are critical for survival in the business world. Even more so in the typical not-for-profit organization.