It’s easy to get bogged down with all the various financial reports available to the modern day nonprofit executive. It’s even harder for board members to make sense of things when they only get an update every few months. Fortunately, there are two reports that will tell you almost everything you need to know. Besides the balance sheet (a.k.a. Statement of Financial Position), the most important financial report for a nonprofit is the budget vs actual report.
A budget vs. actual report is simply your profit and loss (a.k.a. Statement of Activity) compared to your budget. It tells you whether or not you're doing what you planned to do. The profit and loss statement is not very helpful on it’s own. Sure, it tells you how much you’ve raised and how much you’ve spent, but unless that’s compared to something, it’s hard to know if the numbers are good or bad.
If you don’t have a budget yet, then download our budget template here. If you do have a budget, then don’t just let it sit there and gather dust. It’s a powerful tool if you use it. The budget is your strategic plan in numbers version, so looking to see if you’re following your plan is paramount.
Layout of the nonprofit budget vs actual report
A budget vs. actual should be simple: In the first column you have your income and expense accounts. In the second column you have your actual income and expenses to date. In the third column are your budgeted amounts for those accounts, and the fourth column holds a percentage. This percentage shows you how much of your budgeted amount you have raised and spent. I prefer to round up to whole dollar amounts, and only include these three columns. It creates a simple, easy to read format. If you have lots of sub-accounts, it’s worth rolling these up to see the higher level accounts.
How to interpret your budget vs actual report
By running budget vs actual reports, you can see any major variances in income and/or expenses. Then, you can decide whether or not something needs to change or not. Perhaps there’s an explanation for the variance and everything is still fine as is, or perhaps a pivot needs to happen. The budget vs. actual report highlights these areas of concern for you.
Look at the percentages and how they relate to the dates. If you are 50% through the year, you would hope that these percentages are at 50%. If not, then you need to see why.
Focus on the big ticket items
If the grant budget line item makes up a significant portion of your income, then even a small variance in the percentage can have a big impact on your net revenue (bottom line). The same applies to expenses. If personnel expenses are 50% or more of your expenses and you are running a few percentage points over budget, this can have a major impact.
Understand the reason for the variance
The budget to actual report is an alarm bell. You then need to look at why the alarm is going off. What happened with grant revenue? Is it simply a matter of grant funds coming later than expected, or did you actually get denied for a large grant that was part of your budget.
Make decisions quickly
If you have significant variances in your budget vs. actual that are not just a matter of timing, and may affect the sustainability of your organization, you may need to make some immediate spending decisions. The good thing is that if you’re running these reports regularly, you should be able to pivot in time.
Frequency
The Executive Director should be looking at the budget vs actual report on a monthly basis. This way decisions can be made in real time. The board of directors may not need monthly reports, but instead should see them quarterly. This timing depends on the level of involvement of the board. The finance committee may want to see the monthly reports.
Summary
If you’ve already spent the time to create a good budget, then the budget vs actual report should be your best friend. In a glance, you can rest assured that you know what's going on. You can then include this as part of your board reports along with your financial narrative and statement of financial position. With simple, cohesive reporting, everyone will have a clear sense of where you’re at and what needs to happen.
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