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The challenges of budgeting for FY21
Each financial year, when we reach Q4, we discuss the need to look at the coming year’s budget.
It’s no different this year… except it is. We know that this year everyone is experiencing some turmoil, and trying to work out what the future looks like is especially difficult.
Kirsten Forrester, Accounting For Good’s CEO, talks about how to approach the necessary task of budgeting FY21 during the current COVID-19-impacted economic climate.
Exceptional times
There’s no denying it… these are exceptional times. The impact of coronavirus has been felt by thousands of organisations and the nonprofit sector is not immune. For many NFPs, revenue has significantly dropped and their ability to deliver their services has dramatically changed. Kirsten believes this will affect the way budgets are prepared.
“This is going to add a layer of complexity to planning for the next financial year… especially for the first quarter and possibly the second… because, really, who knows what’s going to happen next?
But the overarching principles remain the same. Your budget is always your best guess, at a point in time, about what will happen in the next financial period. It’s just extra complicated now because there is a lot of uncertainty.”
Key elements within your budget remain the same
Despite the current conditions, it’s important to keep the fundamentals front of mind. Budgeting is always a process of planning. Kirsten explains,
“An organisation needs to have an idea of what their strategic plan prescribes for FY21 and the budget is structured according to the costs involved in implementing the plan.
Outline the activities you intend to do in FY21 to achieve your strategic plan… then assess how much the activities will cost and what revenue streams are associated with them.”
When AFG starts to build a budget we always look at staffing costs first. For the majority of our clients, staffing equates to 70% to 80% of the total expenditure, so it makes sense to start with the largest amount.
Once this has been assessed, we move to unavoidable costs. This includes fixed expenses that you are committed or contracted to such as rental payments, utilities and other services – any outgoings that you have in order to be able to run the business.
Finally, we look at the variables. These can be the costs that vary depending on the volume of work that you do. Also, consider here the “nice to haves” in the budget. They aren’t necessities, but if you have the available funds, they are beneficial to the organisation, your clients or membership and your employees.
Extra considerations during this challenging time
Alongside the budgeting process, nonprofit organisations that are experiencing financial stress should be considering how to alleviate some of the pressure.
We know that for individuals who have a reduced income, landlords, banks and service providers have been willing to negotiate reduced rates or freeze loan repayments for a period of time… and this can also be applicable to NFP organisations.
Kirsten recommends having those conversations now to minimise future pressure and to even utilise the budget as part of the request for help.
“When you set your budget for FY21, you need to take into consideration not only what you have agreed upon now, but also what will happen when payments revert back to normal. If you are already feeling the pinch and you anticipate that your position will get worse in the coming months, then the budget can help you build a clear picture. If your revenue is going down but your fixed expenses remain the same, this will be useful information in negotiating with your landlord or service provider now.
Of course, if you do negotiate a lower price, you will also need to include in your budget the time frame for when you start to pay back what’s owed and how long that will take.
Plus, if you are eligible for the ‘Boosting cash flow for employers’ or ‘JobKeeper’ economic stimulus, this should also be factored into your budget for FY21. JobKeeper subsidies will be paid for the period to 27 September, and the second set of cash-flow-boost payments will be paid in the new financial year, equivalent to the payment you will receive in early May for the March BAS. As these are a stimulus payment, you can treat it as cash… there’s no repayment required.”
Can you innovate your services?
If your revenue stream hasn’t been affected by the coronavirus, you might still be experiencing some challenges… especially in the way you deliver your services. If you have had to cease normal activities, you might discover as you get closer to the end of the financial year that you have unspent funds. Kirsten recommends that you find a way to pivot, in order to utilise the dollars rather than return them to funders.
“This is an opportunity to think about what can be done differently. We understand funders won’t want their money back… especially not in the last financial quarter. If a government department ends up with unspent funds, they tend to receive less funding the next year… so it definitely doesn’t work in their favour for you to give them money back.
Government and funders are more interested in seeing service delivery innovation and the funds being spent… so, if you can tweak your services to suit the current situation then do it… if it’s just something small, let your funding contact know and start the process, or if you want to make a bigger change… talk to them first.
There is also the possibility that there will be a more generous approach to rolling over funds from FY20. Everyone recognises that it’s a difficult time and it’s likely that having a small amount left over due to the uncertainty of the current situation will not mean forfeiting the funds. We know that funders are supportive… they want to see you successfully providing your services, so talk to your funding agency and confirm the rollover in writing so that auditors and your accountants can see that you have a clear, approved purpose for retaining the funds and expending them next year.”
Look at best and worst-case scenarios
Even though there are so many unknowns, the accounting still needs to be done. The financial cycles continue and you need to take the time to think about your FY21 budget. If you have been significantly impacted as a result of the coronavirus, we recommend that you outline plans for both the best-case and worst-case scenarios… consider all the variables and what they might mean. This will help you be prepared for the next financial year, regardless of what the future might look like.
Our team of highly skilled NFP accounting specialists is available to help you with your FY21 budgeting. Contact us if you have any questions.
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