executive director resource guide - bbbsi.org · the previous year’s budget becomes the core ......

Big Brothers Big Sisters of Canada

Executive DirectorResource Guide

Book Seven

Budgeting and Financial Management

September, 2006


Contents1. The Budget .....................................................................................5

2. Developing a Budget .......................................................................7

3. Financial Statements ....................................................................11

4. The Annual Financial Audit ...........................................................13

5. Sample Monthly Financial Report Template ....................................15

7. Checklist .......................................................................................17

8. Links and Resources ......................................................................19

4 Executive Director’s Resource Guide

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5Book Seven - Budgeting & Financial Planning

1. The BudgetAn organization’s budget is a written plan to work toward its financial goals. Developing a budget is one of the first things your agency needs to do as part of your short- and long-term planning. It shows, in dollars and cents, what your group is doing, what it wants to do (goals and objectives), and how it wants to get there (what services will be offered). The Board should work with staff, volunteers and community contacts to help develop a budget.

Types of Budgets

There are several methods to use when preparing a budget. Each method has its own advantages but, more importantly, each method requires different ways to justify the need to spend money.

Zero-Based Budget

The starting point for this method is zero. This is the point where new agencies or new programs often begin. Each expenditure must be justified on an individual basis.

Line Item Budget

The previous year’s budget becomes the core for the next year’s budget. Changes are made one line item at a time, often applying a percentage increase or decrease. This is a very easy way to develop a budget, and is useful where conditions are stable from one year to the next, but the outcome may not accurately represent your agency’s priorities.

Operating Budget

The decision on amounts to spend comes after you have established overall goals and objectives, as well as how you are going to achieve them. The process of tying each budget item to specific objectives, as well as the means to achieve them, can be time consuming and require some skill, but the final result reflects the agency’s priorities.

To prepare a budget, the agency must determine what it wants to achieve in the coming year and then realistically estimate all the costs involved, leaving some margin for the unexpected. Likewise, all the revenue should be estimated. For subsequent years, use the previous year’s income and expense sheet as a starting point and then it can be adjusted for inflation and changes in programming or funding. You may find that you need to alter plans to suit the amount of revenue available.

As well as a budget, a cash flow statement should be prepared at the beginning of each fiscal year. A cash flow statement predicts the monthly bank balances using estimated receipts and expenses. This is important because revenues and expenses often do not coincide in real time and there must be money to cover expenses as they occur. If

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possible, a capital budget should be developed. A capital budget looks at a longer time period than one year and plans for the purchase of major capital assets such as equipment, or buildings.

Identifying core areas of services is also part of knowing how you want to achieve your goals. Specifying core services versus projects distinguishes between what you “want” and what you “need”. Some funding is only available for core services.

A budget is only useful if it is used during the year to monitor progress. Predicted revenues and expenses should be compared to the actual income and expenses at least quarterly. Major differences should be looked into and, if necessary, plans changed to correct the situation.

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2. Developing a BudgetThe budget process is an important one, which requires sufficient time for preparation, review and adoption. There are no shortcuts. The Executive Director (ED) should work with their staff to develop a first draft of the proposed budget. This should include accompanying documentation which describes the assumptions underpinning the budget and explains new directions or variances from previous years. The Executive Director, the assigned financial officer if applicable, and the treasurer should then review this draft. This group can then present an annual budget draft to the finance committee three months before the end of the fiscal year. With sufficient “homework” in hand, most of the necessary discussion will have occurred by this point. The finance committee should then submit a proposed budget to the Board at least thirty days before the end of the fiscal year for final approval.

The following steps may be useful in developing a budget.

Step 1 Establish a timetable for preparing your budget

Include what is to be done, who should do it and when. It is often easier to start with when you want the budget completed (or when you must have it completed, as set by your articles of incorporation) and work backwards from there.

Step 2. Collect all necessary information

Use a number of different sources to prepare your budget. This ensures your budget plan is as accurate as possible. Suggested sources include:

your group’s short- and long-term planning documents

past budgets (if applicable)

bookkeeping records

financial policies (e.g., membership fees)

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Keep in mind that many people don’t like working with numbers and may have difficulty understanding the information you have presented. If so, you may want to consider presenting the numbers differently. Grouping expenses by activity and presenting high and low estimates can help others to understand how you came up with the numbers. It is also a great way to find out how well you know your own material.


Step 3. Request input from others

The more input, the more accurate the process; the more people involved, the more people committed to the budget process. You may care to talk to:

volunteers/staff

community contacts (United Way, professional associations, service Agencies)

other Big Brothers Big Sisters agencies

Big Brothers Big Sisters of Canada (BBBSC)

funding sources

Step 4. Review the materials collected and prepare a draft budget

The draft budget should reflect the goals, objectives, and your plan to get there. It should also describe the assumptions underpinning the budget, and explain any new directions or variances from previous years. This will provide context, establish intent and generate useful discussion. There is only one rule to follow: be realistic. The better job you do in Steps 2 and 3, the more realistic your estimates will be.

Step 5. Review the draft budget and prepare adjustments

Draft budgets are made to be changed. Go back to talk to the people who helped you prepare it and ask for their input. You will want to find out two things:

have you missed anything?

how good are your estimates?

Step 6. Present the final budget

The Board must approve the final budget. The information should be presented as simply and as clearly as possible. When approved, the budget establishes the spending guidelines for the next year.

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A surprising number of Board members do not know how to read financial statements! Many Board members are uncomfortable asking detailed questions about regular financial statements. It may be helpful for you to conduct a mini-training workshop on reading financial statements.

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Budgeting Tips

Plan for a variety of possibilities

Revenue should be budgeted conservatively, not optimistically. The budget should include a contingency plan for addressing issues raised by a shortfall or windfall. Few budget projections will be precisely accurate, and so a variety of likely outcomes should be considered. Management should be flexible enough to adapt operations to match actual financial results, although most eventualities can be anticipated in best-case, worst-case and most-likely projections. Expenditures in any current or future fiscal year should not exceed the operating funds that are conservatively projected to be received in that period.

Flexibility

The budget is an important management tool, but don’t let a Board-approved budget lead to inflexibility. Reaching the budgeted revenue goal is a shared responsibility of the Executive Director and the Board of Directors, and is specifically coordinated by the finance committee. In some instances, it’s appropriate for the Board to revise the budget due to unforeseen changes in internal or external circumstances. Well-researched budget projections are usually accurate, but many Agencies operate in a volatile and unpredictable climate. Adjusting the budget is not necessarily a sign of poor management, however a failure to adapt to a changing environment is cause for concern.

Plan long-term

Budgets cover a one-year period, but planning two or more years into the future should occur in parallel. Optimally, the proposed annual budget should be accompanied by projected budgets for the following two years.

Build in accountability

Each major budgetary activity (for both revenue and expense) should have a senior staff person, such as the Executive Director, a Director of finance or perhaps a program Director, clearly accountable for its performance relative to budget.

Ensure adequate capacity for ongoing monitoring

To fulfill its mission, the Agency must have up to date, comprehensive knowledge about how resources are being used. That requires an adequate investment in the people and systems needed to track financial transactions and produce reports. For the Board to get what it needs to monitor the budget, the staff must have the resources necessary to carry out routine financial responsibilities.

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3. Financial StatementsFinancial statements show the annual budget, year-to-date and actual figures. They represent an accurate and detailed “paper trail”. This includes cheques, invoices, receipts (for revenues and donations), and any other documents that relate to the exchange of money. Statements help to answer the basic questions about where money is coming from, where it is going, how much is there and how much is owed. They allow the Agency to accurately tell others, including funders, how well you are doing. They also include explanations of significant variances from budget, either current or anticipated.

Regular financial statements showing the annual budget, and year-to-date actual figures are prepared for review by the Board. When looked at as a whole, the statements are very important for identifying trends and areas of concern. Collectively, the financial statements help answer the question, “How well have we been managing the finances of our Agency?”

Financial statements include:

The Balance Sheet

This statement provides a summary, or snapshot, of the organization’s financial situation at a particular date. It shows a balance of the assets against liabilities and equity. In its simplest form, the balance sheet shows what you own versus what you owe.

The Statement of Revenues and Expenditures (Income Statement)

This statement provides a review of what you have spent versus the monies that have come into the organization over a specified period of time.

The Statement of Changes in Financial Position

This statement combines the information of the other two statements to provide more information about where your funds came from and what they were used for.

Regular Reporting

Most Boards expect to review financial reports that show actual revenues and expenses compared to budgeted revenues and expenses on a monthly basis.

A sample Monthly Financial Report Template is attached at the end of this section.


Monitor variance of actual financial performance to budget projections

Check for amounts that are:

more than 10% higher or lower than budgeted, or

the total amount of variance is more than 1% of the total budget.

Any such variances should be explained with brief notes which should also outline what action will be taken in the coming period to either correct the variances or address an issue that was not foreseen at the time the budget was created.

Periodic projections of revenue and expense, based on timely and reliable information, should identify problems early enough to be remedied before deficits occur.

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4. The Annual Financial Audit Since annual financial audits are a required and well established activity for registered charities in Canada, with comprehensive materials readily available, this section is limited to a review of the particular involvement of a new Executive Director in the process.

Audits of the Agency’s financial statements annually by a firm of Independent Chartered Accountants are widely regarded as a sound practice. The Executive Director and the assigned staff for finance have direct responsibility in overseeing the implementation of the audit. The selection of an appropriate firm can be lead by this team but is always approved by the finance committee.

Preparation for the annual audit usually begins six weeks or more prior to the on-site arrival of the auditor/s. Auditors normally require 3-7 days to complete their work, and a good portion of this may require on-site review of files, documents and interviews with staff and Board members. On-site reviews rarely take less than 3 days. Preparation checklists are normally issued by the auditing firm well ahead of the on-site review, and require the agency to forward certain materials in advance.

The finance committee, and particularly the treasurer, assist where necessary in the audit preparation, and report the final results to the Board of Directors. A representative of the audit firm is invited to attend the annual presentation to the finance committee (usually the Annual General Meeting, normally required to be held no more than 6 months after the end of the fiscal year) and is required to make a presentation to the Board if the audit report is other than unqualified, or if the auditors report material weaknesses in internal controls or reportable conditions.

Tip: Make sure your Board minutes and financial reports are complete for the fiscal year in question! Some auditors require minutes to be signed by Board members (often the secretary and the Board chair).


Necessary Government Forms

Employees:

For details on deductions and payments, see the booklet Income Deductions at Source, available at local District Taxation Offices or online at: http://www.cra-arc.gc.ca/formspubs/menu-e.html

Canada Revenue Agency - Employer Registration: Must be completed by all employees upon hiring to determine amount of deductions available with Employer Registration. http://www.cra-arc.gc.ca/E/pub/tg/rc2/rc2eq.html#P35_551

CPP (Canada Pension Plan Contributions)

Revenue Canada Payroll Deduction Tables provided with Employer Registration.

EI (Employment Insurance Contributions)

Canada Revenue Agency Payroll Deduction Tables provided with Employer Registration.

Income Tax Deductions

Canada Revenue Agency Payroll Deduction Tables provided with Employer Registration.

Receiver General Remittances: Payments for CPP/EI/Income Tax to Canada Revenue Agency by 15th of each month. Forms received monthly following Employer Registration.

Employer’s Health Tax (Ontario): Paid Annually, based on graduated rates according to total annual payroll; call 1-800-461-3806 or Ontario Ministry of Finance - Employer Health Tax.

T4 Summary: T4 slips to employees and reconciliation of Receiver General remittances to Canada Revenue Agency. Package should arrive automatically with Employer Registration. Due annually on the last day in February.

Annual & Government Reports

Audited Financial Statements: Complete within 6 months of year-end and by an independent Chartered Accountant (firm).

Canada Revenue Agency (Registered Charitable Information Return): Within 6 months of year end; submission of Audited Statements. For forms, contact Revenue Canada Charities Division at 1-800-267-2384. Online: http://www.cra-arc.gc.ca/tax/charities/

GST Rebate (Monthly, Quarterly, Semi-Annually or Annually)

Minimum of annual filing; rebate of 50% of GST paid; call Revenue Canada Taxation.

Provincial Sales Tax Exemption: Apply for tax-exempt status: call 1 -800-263-7965 for general information inquiries.

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5. Sample Monthly Financial Report TemplateBIG BROTHERS BIG SISTERS AGENCY OF SOMEWHERESTATEMENT OF OPERATIONSFor the 6 Months Ended June 30, 2005(Unaudited)

Variance

MONTH YTD YTD YTD % of YTD ANNUAL

ACTUAL ACTUAL BUDGET VARIANCE Budget BUDGET

REVENUES

GRANTS

City of Somewhere 3,117 34,310 34,283 27 37,400

Ministry of Something 0 300 300 0 300

Corp. Grants & Donations 0 2,083 0 2,083 0

Charities/Foundations 0 6,160 0 6,160 0 4,717 39,210 39,483 (273) 42,600

OTHER

Annual Mail Campaign 0 59,600 0 59,600 0

Individual Giving Program 1,000 11,000 11,000 0 12,000

Special Event #1 0 11,900 0 11,900 0

Fees 0 0 0 0

Kids’ Lottery 0 363,510 185,000 178,510 185,000

9,358 621,608 952,108 (330,500) 1,042,300

INTEREST & OTHER REVENUE 71 1,996 1,833 163 2,000

TOTAL REVENUES $14,145 $1,320,074 $1,178,425 $141,649 12.02% $1,271,900

Variance

EXPENDITURES MONTH YTD YTD % of ANNUAL

ACTUAL ACTUAL BUDGET VARIANCE Budget BUDGET

PROGRAM

Advertising & Promotion 1,563 94,517 116,477 21,960 128,800

Affiliation Fees 2,053 14,836 14,575 (261) 15,900

Meetings & Conventions 6,247 14,772 9,750 (5,022) 15,400

Salaries 65,575 707,571 671,396 (36,175) 732,400

Training 584 6,616 7,883 1,267 8,600

Travel 2,706 16,936 18,608 1,673 20,300

Special Project

97,759 931,347 918,415 (12,932) -1.41% 1,006,600

ADMINISTRATION

Amortization 1,996 22,510 27,500 4,990 30,000

Insurance 416 6,022 7,333 1,312 8,000

Office/General 4,998 52,966 48,217 (4,749) 52,500

Professional Fees 0 7,102 6,400 (702) 6,400

Telephone 1,477 16,823 16,775 (48) 18,300

19,699 227,853 225,958 (1,895) -0.84% 245,200

TOTAL EXPENDITURES 117,459 1,159,200 1,144,373 (14,827) -1.30% 1,251,800

EXCESS (DEFICIENCY) ($103,313) $160,873 $34,052 $126,822 $20,100

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7. ChecklistUse the checklist to determine whether your budget, finance systems and processes are appropriate for your situation. This is a guideline only and does not substitute for or replace Big Brothers Big Sisters of Canada’s National Standards.

Capacity

The Board treasurer is skilled at financial analysis

The agency has adequate people and systems to track financial transactions and produce reports. Those responsible for accounting are sufficiently qualified and trained.

Policies and procedures provide clear and appropriate guidance for budgeting and financial management purposes, and are revised as needed.

Information and records management systems, including electronic hardware and software, are compatible with current industry expectations and enable efficient, accurate tracking of data and the timely production of meaningful reports.

Budgets

The Board is involved in developing a long range (at least 3 years) budget to support the agency’s strategic direction, focused on program delivery, growth and the capacity to achieve both of these.

The annual budget is built on a realistic picture of what the agency hopes to accomplish. It is clear and easily understood.

Budgets are prepared well in advance to allow time for evaluation, input and revision

Financial Statements

Budget-to-actual performance is monitored by the finance committee on a monthly basis.

Financial reports include explanations of significant variances from budget, either current or anticipated. Financial statements are easily understood and provide meaningful comparative information for the previous year and for the current budget.

Financial Audit

The agency has an annual independent audit from a reputable, qualified independent accounting source with no material findings.

Financial policies are approved by the Board, documented and reviewed annually

The agency maintains an internal auditing system

The agency has a policy on signing authority which ensures a minimum of one Board member signature

Limits are put on over-spending without Board approval

There is a permanent record of financial and other gifts to the agency showing the date, name of donor, relationship to association and nature of donation

Minutes recording decisions of the Board are on file. These include decisions regarding accounting policies and approved budgets.

At least 80% of all expenses are directed to the Charitable Objects of the organization

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8. Links and ResourcesFor a sample list of Finance Policies, see the Policies and Procedures chapter of this Guide.

Registered Charities and the Income Tax Act: http://www.cra-arc.gc.ca/E/pub/tg/rc4108/rc4108eq.html

A useful document to familiarize the Executive Director with financial requirements of charities in Canada. Or try at www.ccra-adrc.gc.ca/charities

for general publications by Canada Revenue Agency.

Financial Responsibilities of Non Profit Boards, Muttart Foundation. A self-guided guidebook that provides a step-by-step approach to developing a budget. Also provides many other tools for all areas of financial management. http://www.muttart.org/workbooks.htm

The federal government’s one-stop information source for your human resources management needs, including information on laws and regulations, forms, etc. Links to relevant provincial sites. http://hrmanagement.gc.ca/gol/hrmanagement/interface.nsf/

The Employment Standards Act (provincial) also covers hours of work, public holidays, overtime pay, benefit plans, pregnancy and parental leave and termination issues. Copies are available from the local Ministry of Labour Office. Online: try a Google search: Ministry of Labour & your province or try Employment Standards Act & your province.


113E–3228 South Service RdBurlington, ON L7N 3H8

www.bigbrothersbigsisters.caE.D. Resource Guide v1.0 2006

executive director resource guide - bbbsi.org · the previous year’s budget becomes the core ......

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