Challenges In Budgeting For Charitable Organizations: An Essay.

a) What would be the greatest challenges in budgeting for such an organisation?
b) Do you think not-for-profits need to be as concerned with budgeting as do for-profit organisations? Explain the rationale for your answer.

Charitable organization

This study identifies a charitable Organisation where the various activities carried by the Organisation are listed. The Australia Salvation Army eastern territory Organization is selected as the reference charity Organisation in the study. Further, the study continues to outline the various major challenges in budgeting, which affects the charitable organizations. Additionally, a discussion about whether the not-for-profits organizations should be concerned with budgeting is rolled out. A clear rationale for the same is outlined.

It is important to note that while all charities are not-for-profits organizations, not all not-for-profit Organizations are charities. In Australia, all charities are regulated by a national independent commission referred to as Australian charities and not for profits Commission (ACNC).  According to the ACNC register, there are more than 54,000 charities, which have been registered by the year 2018.  One of the registered charity Organisation is the Salvation Army eastern territory. This Organisation will form the basis of this study. The main activity for Salvation Army eastern territory is to provide social services. The Organisation, additional, provide the following list of services as part of their activities; addiction recovery services, aged care plus services, emergency and disaster recovery services, employment plus services, fighting modern slavery, homelessness accommodation services, international development activities, salvos funerals, salvos legal and youth services.

Every organisation should have a stable financial stability in order to maintain its operations.  The basic component of financial stability is the commitment of the organization’s board and staff to proper financial management. This informs both the timely review of financial reports and advance planning. Creation of budget is one of the ways in which the Salvation Army eastern territory board and staff plans for the future income and expenses.  A coherent financial management is characterized by a fundamental building block of approving the annual budget.  The role of budgeting is the responsibility of the staff. However, executive or finance committee drawn from the Board reviews the proposed budget.  The full board is meant to adopt the reviewed budget during a full board meeting. This approved budget acts as a foundational guide for the financial activities to be carried out by the charity in the few months ahead. Notably, charity being a non-profit Organisation, its financial position may change during the year. For this reason, the organization’s budget should not be permanently drafted, as it should be reviewed as the financial position of the charity changes.

Greatest challenges in budgeting for the salvation army eastern territory

In the context of charity organizations, a budget can be described as a guide that assists the organization to arrange and make future plans as well as assessing its current financial status. Charity organizations budget should be subjected to periodical reviews to build a comparison between the budgetary estimates and the actual cash flows and estimates. This helps the board of management to determine whether the Organisation is in course with its annual strategic plans and objectives. This also gives room for budget reviews to align the financial plans with the actual cash flows and expenses. Other stakeholders utilize charitable organization budgets and partners like banks and other financial institutions or even donors to determine whether the organization funding is properly utilized.

Salvation Army eastern territory encounters several challenges when drafting a business budget just like many other not-for-profit organizations. The challenges range from organizing sources of income to maintaining compliance. One of the challenges that Salvation Army eastern territory encounters when creating its budget is the instability in the revenue cycle. Since the Organisation does not operate on profits; its operations are dependent on donors and sometimes governments and foundations.  The activities of the charity are financed through donations, government funding, and gifts. The challenge of instability is because of donors failing to channel their donations, the government may put an end to its funding and the foundations may decide to withhold their gifts. The instability and inconsistency in funding are an early warning sign that the organizational budget will be characterized by frequent evolvements to account for incoming and diminishing resources. The accountants and financial planners for charity organizations should constantly continue looking for new funding opportunities to curb this challenge of unstable income.

Another prominent challenge facing charity organizations in matters budgeting is the lack of financial education.   Financial education is a key element in the budget-making process.  A competent person who has clear knowledge in financial education develops a realistic and effective budget. Many charity organizations including salvation army eastern territory do not have members of the staff with the requisite financial knowledge for budgeting tasks. It is for this reasons that they are not able to draft a line-by-line budget required for a successful operation. Most of the staff in the majority of the charity organizations are volunteers with no financial skills and expertise to develop a realistic and operational budget. Salvation Army eastern territory should consider utilizing the available non-profit budgeting tools to address this challenge.  Such budgeting tools as planning software can be used to construct a realistic business budget for the organization. The software is also advantageous as it helps the organization to track all its essential financial details.

Instability in the revenue cycle

Another challenge facing charity organizations as far as budgeting is concerned is the issue of inadequate staffing. Consider the case of Salvation Army eastern, it is a huge organization with a broad mandate taking into account the activities it’s involved in and also taking into account the wider region it is covering (Australia capital territory, New South Wales and Queensland). The number of staff working in the Organisation does not match with the labour demand.  Due to extreme workload, the employees are overwhelmed with other responsibilities in that they opt putting budgeting on the back burner. This also goes in line with the explicit requirement for financial knowledge to draft a sensible budget. Employees opt to evade the budgetary drafting responsibility, as most of them despite being few in number does not possess the financial knowledge required to draft a realistic budget. To curb this challenge, the charity organization should consider introducing and adopting the use of budgetary tools.  With a budgeting software, the organization can develop a financial plan encompassing its goals while integrating income statements, balance sheets, and cash flows. The utilization of budgeting tools will reduce the labour demand required in drafting and developing a budget for the charity. The tools can also be utilized to look for the future potential financing opportunities.

It is a worldview acknowledgment that budgeting Is a time-consuming exercise and an imperfect process. The charities are facing a budgeting challenge of “use it or lose it” mentality. The personnel entrusted with the responsibility of drafting the budget are not focused on that they second-guess what will happen in the coming financial year. They thus draft an unreliable budget with the mentality that the budget will be periodically reviewed and revised.   It is because of such undoing that the budgeting has become synonymous with management control systems. The bottom line for any no-profit Organisation including charities is to measure their impact. It should be about measuring a surplus or a deficit. Budgeting has shifted the focus of the charities and in general the not-for-profit organizations from being impact-oriented to focusing on surpluses and deficits. It has made the charities shift their energies on the wrong place as opposed to concentrating on what they are delivering to the beneficiaries.  The not-for-profit organizations need to adopt a beyond budgeting approach to curb this challenge. This approach does not recommend doing away with budgeting but adopting controls in addition to budgeting to keep the Organisation focus on its mandate. The beyond budgeting approach provides a simple, low cost and a more relevant alternative to budgeting. It promotes good governance and ethical behavior.

Lack of financial education

It is my submission that the not-for-profits organizations need to be concerned with budgeting just as profitable organizations are concerned. It is a common knowledge that if a for-profit or not-for-profit Organisation runs out of cash reserves to continue its operations or provision of services, there is a high likelihood that the Organisation will fail.  It is important to note that budgets are not only a method of allocating resources but it’s an avenue of controlling expenses. Consecutively, whereas the financial team and financial manager of for-profits organizations plan and budget enough funds for operations and development, a financial supervisor for not-for-profits plans and budget sufficient lead-time to get grants and funds for organizational programs. Additionally, it's imperative to note that whereas the main goal for a for-profit Organisation is maximizing profits and financial benefits for its shareholders, the end goal for not for profit organizations is to ensure there are enough profits to continue making the difference.

One of the rationales as to why not-for-profits organizations need to be concerned with budgeting is that a budget is used as a tool to assist the Organisation to focus on their goals and mission.  The organizational budget is developed based on various activities and programs which the Organisation intends to undertake throughout the year. These activities and programs are in line with the organization’s goals and mission. Not-for-profits, therefore need to be concerned with budgeting to remain in course with the organization's goals and mission. Without budgeting, charities may lose focus and forget of their mandate.

Transparency and accountability is a contemporary global virtue that should be adopted by all organizations. Since not for profits organizations gets its resources to finance its operation from donors, government funding and gifts from the foundation, a high level of transparency and accountability is expected.  It is the role of a budget to show accountability and transparency of the Organisation. A good budget displays exactly how the resources been given out is utilized by the Organisation. In conjunction with accountability and transparency, the budget enhances better oversight and review. It is through the budget that the not-for-profits will show where the resources were wired to, how much was spent on projects/programs and how much revenue is being generated.

Every Organisation has its strategic goals. Thus, not-for- both profits and for-profits organizations have their strategic goals. The strategic goals range from short-term to long term. The strategic goals are dependent on the availability and timing for funding.  The budget allows the Organisation to focus on the short term and long-term goals. The not-for-profits organizations need to be concerned with budgeting in order to realign their strategic goals with the availability and timing of funding. If the not-for-profits organizational budget is not strategically planned, then it means that the Organisation may not clinch its highest potential. Another rationale as to why the not-for-profits need to be concerned with budgeting is for control purposes. Budgeting enhances financial controls, which gives room to set the spending limits. Through budgeting, an Organisation is able to maintain costs/expenses in line with the revenue generated or the amount of income in the Organisation. Through setting the spending limit and enhancing the cost control mechanisms, the Organisation will be saved from overspending and ensure the board of management is making viable and beneficial decisions for the organization.

Inadequate staffing

Every Organisation has a bottleneck and so does the not-for-profits. They have operations, which operates at their maximum capacity. In those operations, there is no additional work that can be accepted beyond its immediate production level.  The bottleneck is the key drawback towards the ability of an enterprise to maximize its sales and profits. Through outsourcing work, reconfiguring products and services and increasing efficiency, the effects of the bottleneck can be minimized. The budget comes into to help analyze the constraints. It's through budgeting process that the Organisation can consider on what to be done by either expanding the capacity of the constraint or to eventually shift the job around it. Thus, the reason why a not for profit Organisation need to be concerned about budgeting is to facilitate the constraint analysis.

Conclusion

In conclusion, the study has focused on the Salvation Army eastern territory charity Organisation which is registered by the Australian charities and not for profits commission as required by the Australian law. The study has further outlined the various activities carried by the Salvation Army including addiction recovery services, aged care plus services, emergency and disaster recovery services, employment plus services, fighting modern slavery, homelessness accommodation services, international development activities, salvos funerals, salvos legal and youth services. However, the main activity of the Salvation Army charity Organisation is to provide social services.

Further, the study has continued to discuss the various challenges in budgeting, which faces the charity Organisation in view of Salvation Army Eastern Territory Organisation. Such major challenges as instability in revenue cycle, lack of financial education, inadequate staffing and the challenge of use it or lose it mentality has been deeply discussed. The study has gone a step further to recommend various strategies towards curbing those challenges including adopting the beyond budgeting approach among others.

Additionally, the study explores whether there is a need for the not-for-profits to be concerned with the budgeting just as the for-profits are concerned.  To support the answer to the affirmative, the study outlines the rationale behind the concurring answer that the not-for-profits need to be concerned. Among the reason cited, include enhancement of transparency and accountability, to enable the organization to focus on its goals and mission, realigning the strategic goals with the available income and timing of funding, constraints analysis, performance evaluations, and planning orientations.

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