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 atwww.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^stqtr. 10%, 2^ndquarter 60% and 3^rdquarter 30%

Contributions$40,000.1^stqtr. 20%, 2^ndqtr. 20%, 3^rdqtr. 10%, 4^thqtr. 50%

Grants$40,000.4^thquarter 100%

Endowment Income$5,000.25% each quarter

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

Total Revenue$94,600.

Expenses:

Travel$4,000.1^stand 2^ndquarters 20%, 3^rdquarter 35%, 4^thquarter 25%

Special Events$8,000.1^stquarter 20%, 2^ndquarter 50%, 3^rdquarter 30%

Conferences$2,000.3^rdquarter

Fundraising$6,000.1^stquarter 20%, 2^ndquarter 30%, 4^thquarter 50%

Insurance$4,000.1^stquarter

Newsletter$5,000.25% each quarter

Postage$3,000.25% each quarter

Professional Fees$5,000.1^stquarter 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.

1) Create a line item Operating Budget for the following (next) year using the Current Year numbers and the assumptions about changes in individual line items.

a)Calculate the CWC's surplus or deficit for thecurrent year as a dollar amount and as a

percent of annual expense.

b)Without much information about the organization, does any ONE expense seem

unusually high / low during thecurrent year?

c)Use the assumptions concerning changes in the various revenue and expense line items to

calculate the CWC's surplus or deficit for thenext year as a dollar amount and as a

percent of annual expense.

d)Does the budget for thenextyear meet their goal of a 5% (percent of annual expense)

budget surplus?

e)Calculate the amount they need to cut (or have as an extra surplus). Suggest alternatives

for achieving the 5% budget surplus target.

2)Prepare a quarterly cash budget for the next year. Assume all revenue and expenses occur on the last day of each quarter. Also assume a $40,000 beginning cash balance. Add 1% each quarter based on the beginning of quarter cash balance (.01 x beginning of quarter cash balance) as interest income. Re-calculate the "Interest Income" line item for the year.

a)Does the CWC have adequate cash reserves to get them thru the year?

b)How large (calculated both as a dollar amount and as a percent of annual expense) is the

lowest quarterly ending cash balance?

c)If they lack sufficient cash flow, what might they do to correct the problem?

d)Why did the Interest Income line item increase (decrease) from the budgeted amount?