Chippewa Watershed Conservancy: Not-for-profit Budgeting

Case II: Functional and Flexible Budgets

Case II is a continuation of Case I. In this case you will convert the line-item budget developed in Case I into a functional budget. Then you will employ further information to create a flexible budget. Refer to the Case I Solution for data.

Assume that the CWC has adopted the budget as developed in Case I even though it does not hit the 5% budget surplus target. Now they want you to allocate the budget into functional areas. Revenue is not allocated to functions. However, expenses are allocated to functions using the percentages shown in the following section.

Part A: Functional Budget

Program Functions Stewardship: Management of easements and preserves.

Outreach: Publicity and Education.

General Program: Activities directly related to project development.

Support Functions

Administration: Management of the organization and other activities not directly related

to project development

Fundraising: Grant-seeking, special events, and fund appeals

P R O G R A M S U P P O R T

Stewardship Outreach General Administration Fundraising

Program

Expense

Travel 50% 10% 20% 10% 10%

Special Events 100%

Conferences 50% 50%

Fundraising 100%

Insurance 60% 20% 20%

Newsletter 80% 20%

Postage 10% 30% 10% 10% 40%

Professional Fees 50% 50%

Publicity 100%

Salary 30% 10% 30% 20% 10%

Supplies 30% 10% 20% 30% 10%

Payroll Taxes 30% 10% 30% 20% 10%

Telephone 30% 10% 30% 20% 10%

Questions for Part A:

1) Create a Functional Budget for the upcoming year. Use the revenue and expense allocations provided above and the Case 1 Solution for the next year.

2) What percent of the total expense budgeted by the CWC for the next year is spent in each of the five functional areas? What percent is Program expense (total of Stewardship, Outreach, and General Program) and what percent is for Support (Administration and Fundraising)?

Part B: Flexible Budget

The CWC budgeted on the basis of the existing 14 preserves and 27 conservation easements.

New refers to additional preserves and/or easements.

X% refers to the percentage of the original budget.

Add:

Travel: 3% for each new project in Stewardship

3% for each new project in General Program

Postage: 1% for each new project in Stewardship

1% for each new project in General Program

Professional Fees: 5% for each new project in General Program

Supplies: 1% for each new project in General Program

Telephone: 4% for each new project in General Program

Salary and Payroll Tax

Shift 3% from Administration to General Program for each new project

Note: 2% refers to the percent of the original budget. If the budget for a line-item is $1,000 and 10% is assigned to a particular function (such as General Program), then if an additional 6% is added to that function (due to 3 new projects with 2% per new project) the new budget for that function is [10% + (3 x 2%)] multiplied by the original budget for that line item. In this case, .16 x $1,000 = $160 while the budget for the entire line-item is $1,000 x 1.06 = $1,060.

No additional staff will be hired. The CWC plans to have some administrative duties performed by volunteers or deferred.

Questions for Part B:

3) Prepare a Flexible Budget for the five functional areas based on 3 new projects.

4) Calculate the budget surplus/deficit based on your Flexible Budget. Do not change revenue from the total column in the Case 1 Solution Cash Budget. Recalculate the budget surplus/deficit as a percent of total expense.

5) What percent of the new budget is Administration expense? What dollar amount?

6) Does it appear reasonable that the CWC can handle the level of activity described in question 3 without an increase in revenue? Why? Discuss any concerns.

Below is the Case I Information :

4Chippewa Watershed Conservancy:

Not-for-profit Budgeting

John B. Mitchell

Central Michigan University

Land trusts, also known as conservancies, are not-for-profit organizations dedicated to protecting wildlife habitat and natural lands by acquiring ownership rights and transfer of development rights (conservation easements) either thru donation or purchase. This series of cases follows a small land trust through the process of budgeting. Case I requires students to develop and analyze an annual line-item budget and translate that budget, and additional information, into a quarterly cash budget. Case II requires students to convert the line-item budget into a functional budget. Further information is employed by students to create a flexible budget. Actual numbers have been obscured while remaining true to the problems faced by the organization.

Chippewa Watershed Conservancy: Not-for-profit Budgeting

Case I: Line-item and Cash Budgets

INTRODUCTION

The Chippewa Watershed Conservancy (CWC) is a small (one staff person) land trust operating in the Mt. Pleasant, Michigan area. Founded in 1985, the CWC has protected 3,494 acres in the Central Michigan area and ranks in the top 10 out of more than 40 conservancies in Michigan in acreage protected. They can be found on the web at www.chippewawatershedconservancy.org.

Brief History

The CWC operated on a volunteer basis from 1985 until 2004. During that time period volunteers performed all management functions and succeeded in protecting more than four square miles of wildlife habitat in five counties. However, it became apparent that due to the increasing number of protected parcels and the evolution of legal requirements and management standards that the CWC needed professional leadership. In 2004 a part-time employee was hired. That position was increased over the next several years to a full-time Executive Director status. Over that time period management responsibilities were transferred from volunteers to the Executive Director. Members of the Board of Directors (BOD) continue to serve in a volunteer capacity; however, most of the management of the organization is now performed by the Executive Director. Some technical functions, such as legal review of conservation easements, annual audit, and some routine accounting are contracted out. Members of the BOD, and other volunteers, continue to help with membership, fundraising, stewardship, and new project evaluation.

The BOD is extremely concerned that the CWC be managed so that it is sustainable. The commitments of land trusts are, by their very nature, long-term (actually perpetual). Therefore, the CWC must ensure that they have a business plan and budget that will ensure their long-term survival.

The Current Situation

The Executive Director is formulating an Operating Budget recommendation for the next year. He has made a series of assumptions based on previous year performance and expectations about the coming year. He is particularly concerned about increased energy costs and a likely recession that may hold down contributions and foundation support. The CWC wants to budget for a 5% (of total expense) surplus to provide protection against unforeseen events.

Your role is to prepare the budget for the following (next) year based on the assumptions adopted by the Executive Director and the budget for the current year. You will also be asked to analyze the results of those budget assumptions.

Assumptions for NEXT budget year:

Revenue: Special events will increase by 30% due to a new event. Contributions will increase by 20% due to new membership drives. Grants will fall by half due to the end of a current grant. Interest income will be unchanged from the current year, but endowment income will be up 20% due to large endowment contributions in the current and previous years.

Expenses: Special events will increase by 30% due to an additional event while there will be a 20% increase in fundraising, newsletter, and postage expenses. The staff person has already been notified that he should not expect a raise. All other expenses, with the exception of payroll tax, which is proportional to wages, will increase by 10%.

Current Year Budget

Revenue: Timing:

Special Events $8,000. 1^st qtr. 10%, 2^nd quarter 60% and 3^rd quarter 30%

Contributions $40,000. 1^st qtr. 20%, 2^nd qtr. 20%, 3^rd qtr. 10%, 4^th qtr. 50%

Grants $40,000. 4^th quarter 100%

Endowment Income $5,000. 25% each quarter

Interest Income $1,600 interest on operating fund (1% prev. qtr. ending bal.)

Total Revenue $94,600.

Expenses:

Travel $4,000. 1^st and 2^nd quarters 20%, 3^rd quarter 35%, 4^th quarter 25%

Special Events $8,000. 1^st quarter 20%, 2^nd quarter 50%, 3^rd quarter 30%

Conferences $2,000. 3^rd quarter

Fundraising $6,000. 1^st quarter 20%, 2^nd quarter 30%, 4^th quarter 50%

Insurance $4,000. 1^st quarter

Newsletter $5,000. 25% each quarter

Postage $3,000. 25% each quarter

Professional Fees $5,000. 1^st quarter 70% and 10% each remaining quarters

Publicity $3,000. 25% each quarter

Salary $38,000. 25% each quarter

Supplies $4,000. 25% each quarter

Payroll Taxes $3,800. 10% of Salaries and Wages each quarter

Telephone $1,200. 25% each quarter

Total Expense $87,000.