Non Profit Organization Budget Recommenddations Accounting Essay


Budget is a formal accounting plan, for managing resource in a time period with defined objectives. The budget goals and performance are a better basis for judging actual results. In the budgeting process the communication is a key to successful. The top management make goal and objectives and the lower managers need to interpret it to the employees.

Typically, budgets are created on a monthly or yearly basis. While a yearly budget can provide a "big picture" view of your finances, taking into account the irregular expenses. An annual budget requires the estimate of all expenses, including those that occur only once or twice a year - such as insurances or activities expenses.

In the non-profit organization the role of budget is prioritized of: organizations goals, authorize the expenditure of resources to meet goals, improve quality of services in the near term & communicate performance effectiveness.

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Budgets don't guarantee success, but help to avoid failure. It is an essential to translate general plans in specific goals and objectives. It is also crucial to remember that a large organization consists of complex structure. Each component need to work together. The budget is the tool that communicates the expected outcome and provides a detailed script to coordinate all of the individual parts to work in concert.


Budgets can take many forms and serve many functions, also can provide the basis for detailed sales targets, staffing plans, inventory production, cash investment/borrowing and capital expenditures. Budgets give managers "preapproval" for execution of spending plans to provide forward-looking guidance to investors and creditors. Budgets are necessary to convince banks to give or extend credit. Exist too many types of budget, two of this types are capital budget and master budget [1] . The components of master budget for non-manufacturing are operating budget (Sales, purchases, cost of goods sold, operating expenses budgets & Budgeted Income Statement) & Financial Budget (Capital & Cash Budget, & Budgeted Balance Sheet). We can make a master budget with various method such as top- down or bottom- up budget.

To make a budget we need to take the current operating data to make a performance evaluation using historical data. With its and outside situation we can forecasting and planning the future information.

To be more effective, the firm budget should be an integral part of the strategic plan. The master budget summarizes of all the firm's budgets into a projected financial statement and schedules. The operating & financial budget are prepared usually for a year. A budget display a plan of action for future operations. It coordinate some activities to provide it controls. The budget must be prepare for all the elements of the chain value. To begin the budget the preparers need to make a sales forecast a production or service schedule, estimate the expenses and incomes maintain updated with the external factors.

Nobody can say what will happen in the future, but with a good sense of the past, we can predict the future. We learning from mistakes and experiences, while making the budget must be alert to trends in the economy, market and customers. The budget committee need to have a very, very good communication with the divisions of the company. For example, the budget preparers can distribute a survey to department's managers to consider their needs. They should also ask for a marketing study, customer satisfaction study and information about product changes.

The budget preparers or budget committee needs to know about the changes in the economy, the changes in the markets, the unemployment rate, the inflation rate, the global & political situation, the laws in the operating countries, the internal patents and the internal controls before takes the financial statements to make a new budget. In most companies the budget committee is compose by senior level personnel. We must take the last three years financial statement and prepare the budget but if occurs an external situation and the company is not prepare for it, can be dangerous. In the budgeting committee at least must be a person with extensive knowledge of current outside company situations. An example: if the company expects to increase the sales a 30% for the next year, but in the country from which brings the raw material occurred a coup and no material will leave after six months later. If the company can forecast it can be make the changes that it needed. We most work with top-down and bottom-up.

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The top-down budgets will begin with upper-level management establishing parameters under which the budget is to be prepared. These parameters can be general or specific. They can cover sales goals, expenditure levels, guidelines for compensation, and more. Lower-level personnel have very little input in setting the overall goals of the organization. The upper-level executives call the shots, and lower-level units are essentially reduced to doing the basic budget calculations consistent with directives.

exhibit 1


The bottom-up [2] is driven by involving lower-level employees in the budget development process. Top management may initiate the budget process with general budget guidelines, but it is the lower-level units that drive the development of budgets for their units. These individual budgets are then grouped and regrouped to form a divisional budget with mid-level executives. Eventually top management and the budget committee will receive the plan, review the budget components for consistency and coordination (this may require several iterations of passing the budget back down the ladder for revision by lower units), and a final budget is reached. Many companies uses the bottom-up to examine each expenditure in their budgets.

Some companies use the top-down budgeting because they understand the hierarchy that must be followed. But they don't seek the true needs of the firms. Each firm is different, so each one have different needs and they should seek the best suits them, Top-down or buttom-up.


The sales budget is the starting point because the inventory level, purchases and operating expenses depends of sales activities. In the non-profit organizations the revenue budget replaced the sales budget. At the same time the cash collection schedule must be prepared, because the firm needs cash to operate. See exhibit 3. The sales budget reflects forecasted sales. This is influenced by previous sales patterns, current and expected economic conditions, activities of competitors, and so forth. The sales budget is complemented by an analysis of the resulting expected cash collections.

After concluding the cash budget we are going to prepare the purchases budget. If no occur changes in the prices of goods we must use this formula: Budgeted purchases= desired ending inventory + cost of goods sold - beginning inventory. Now the cash disbursement for purchases. This is based on the purchased budget, we will uses the disbursement in cash budget. In this example the purchases budget is not the common purchases budget because we don't have the amount of beginning balance of inventory and sales are not the principal business in a service non-profit organization. So we can prepare a schedule for purchases with the actual data.

Exhibit 3

Schedule of expected Service & Cash Collections


1 2 3 4 Year

Beginning 0

Registration 24,381 24,381 24,381 24,381 $97,524

Monthly Income 161,169 161,169 161,169 161,169 644,683

Non- recurrent Income 32,655 32,655 32,655 32,655 130,620

Sales 1,026 1,026 1,026 1,026 4,104

Recharges 4,248 4,248 4,248 4,248 16,992

Total Collections $223,479 $223,479 $223,479 $223,479 $893,916


The operating expense budget depends of several factors like monthly changes in sales and the variability of operating expenses. The last schedule is the disbursement for operational expenses. This schedule include wages, commissions, and miscellaneous and rent expenses.


Now, prepare the budgeted income statement. First we take a lot of operations data, and then we finish adding interest expense. See exhibit 3

Exhibit 3

Budgeted Income Statement for 2011 - 2012

Budget Old Actual New Budget


Service Revenues $773,478.46 $756,676.85 $751,208.00

Contributions 28,250.00 38,385.15 43,600.00

Sales 4,100.00 3,706.86 4,100.00

Total Income 805,828.46 798,768.86 798,908.00


Wages and Salaries 618,704.38 601,184.90 600,110.00

Supplies 16,400.00 18,776.97 14,400.00

Equipment 12,000.00 10,080.74 10,100.00

Utilities 74,900.00 68,047.33 72,300.00

Activities 14,500.00 17,443.31 11,023.57

Insurance 9,600.00 9,448.50 7,381.25

Maintain 20,000.00 18,692.56 15,000.00

Outsource 14,000.00 10,196.32 6,500.00

Banking 25,000.00 25,590.00 12,000

Total Expenses 820,703.26 795,407.48 760,658.00

Operating Income (10,874.80) 7,068.45 41,750.00

Interest Expenses 4,000 3,707.07 3,500.00

Income Statement after Interest $(14,874.80) $3,361.38 $38,250.00


Income from Loan 14,874.80 0 0

Outcome to Invest 3,361.38 38,250.00

Net Income 0 0 0

For non-profit organization the net income must be equal to zero. So, I made an adjustment account. This is all the process to do an operating budget. Next step in the making of master budget is the financial budget.


The financial budget consist of capital budget, cash budget [3] and ending balance sheet. The cash budget schedule is like the sales or service budget schedule. This budget prevent for possible illiquidity of the company, if we have the amount of cash needed to fulfill the responsibilities and to cover contingencies of everyday is because we are doing a good cash budget.

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The cash collection is taken from the sales budget. We most see if in any quarter we need to take credit to comply with the liabilities or we can pay any liabilities with the excess of cash. The successful of make a good cash budget is reflect if the company don't have too large or too small amounts of cash in their accounts.

After concluding with cash budget we work with capital budget and budgeted Balance Sheet. This is the process of the services companies to budgeting. It's simpler that manufacturing company but is almost the same process.


The case study is about a private school. In these cases the government allows the organization to use the FASB rules, although as be nonprofit many professionals recommend double book: the FASB and fund accounting.

First, the board of directors of this private school is composed of teachers, lawyers, doctors, a CPA and others. The person preparing the budget is the accountant and the head of human resources. Not study accounting. The school enrollment is 325 students and operates with 44 employees. The budget information is in the annexed. How we can provide performance their budget and explain to the board of director if no one in the board understand the process of budget.

To begin we must eliminate all primitive custom. The accountant working paper cannot come to the board because too many information difficult the decisions making. But are people who prefer to see all the accounts of the organization to approve the budget, they should get used to taking digested information as possible. How? With dashboard and scorecard. Once the budget process is done the information must be digested to facilitate making decision.

In a service organization the "sales" term is not important so every know about sales is changed to service. We don't work with inventories or cost of goods sold. The important thing is to know how to distribute the budget.

With the application of fund accounting we need to create the next fund for the school: General Fund, Utilities Fund, Physical Education Fund, Salary &Wages Fund, Equipment Fund, etc. We need to create a fund for each group of expenses. Reclassified the accounts because has to many account separately and causes confusion.