The budgeting process is often intimidating because it is seen as being technical and time consuming. A budget for a not-for-profit organization need not be complex to be effective and can be prepared by the Finance Committee or any person on the Board of Directors.

This article presents a framework for preparation of your budget, several time saving tips and a few tricks of the trade.

What to budget

Before preparing a budget you have to know your organization’s objective. Remember that your budget is meant to provide a road map of where your organization is going. Your Board provides the objective and your job is to plot a route there.

Assuming that ongoing solvency is the objective you would budget revenues and expenses for the year. Depending on the size of your financial cushion and the direction the Board wishes to take you could plan to break-even, generate a surplus or operate at a deficit. To permit your Board to monitor levels of cash in more detail throughout the year you could prepare a budget of monthly cash flow. The objectives of budgeting revenue and expenses and budgeting monthly cash flow are different. This newsletter examines techniques for preparing each of these types of budgets.

What period/cycle to use

The period covered by your budget depends on your circumstances. If you have a ten month program from September to June then it would make sense to prepare a budget for the ten month period. If, on the other hand, you have a year-round program with little change in enrolment you should consider preparing a budget from January to December.

Should you estimate revenues or expenses first? It really doesn’t matter. Estimate one then the other and if your objectives are not met then estimates for one or both will have to be adjusted.

Annual revenue and expenses budgeting

The primary objective of an annual budget of revenue and expenses is to provide your Board with the information required to operate the centre using resources as efficiently as possible. First, your Board should determine on an annual basis whether you want to:

·         run at a break-even level for the year (assuming the financial cushion is adequate)

·         operate at a small surplus for the year (assuming a larger financial cushion is required)

·         operate at a deficit (assuming the financial cushion should be reduced).

Estimating revenue for the year

Revenue comes to your centre from several sources: parent fees, municipal fee subsidies, salary and other grants, GST rebates, fundraising and interest. In childcare, parent fees and municipal subsidies are by far the most significant component of revenue and should be the focus of your efforts.

Parent fee and Metro subsidy revenue is calculated by multiplying the expected number of children in the program by the fees to be charged. This calculation is best done on a program by program basis (e.g. infants, toddlers, etc). While the calculation itself is not hard, predicting actual revenue can be very difficult as enrolment can fluctuate substantially over the course of the year. Accuracy is difficult so simply estimate enrolment as best you can and carry on with the rest of the budget. Periodically throughout the year (i.e. at least quarterly) revise revenue estimates taking into account changes in expected enrolment.

Following are a few points to take into account when estimating fee revenue:

·         Focus on total levels of enrolment. Don’t spend a lot of time differentiating between full-fee parents and those receiving subsidy unless rate differences are quite significant. Generally rate differences are not nearly as serious as enrolment fluctuations.

·         If you are doing an annual budget then you normally need not take into account parent deposit policies as deposits are either used up by the end of the year or are carried over to the next year. (However, parent deposits will be a significant factor in a monthly cash flow budget.)

·         Take into account fee fluctuations resulting from special rates charged for PA days and March and Christmas breaks.

·         Factor staff and multiple child fee discounts into revenue estimates if applicable.

·         Estimate summer revenue as best you can. In April or May you should revisit enrolment level and fee estimates once details of the summer program have been settled.

·         Factor some allowance for uncollected fees into your revenue estimates. You will generally be better off using past experience at your centre instead of industry averages.

Salary grants

Direct operating, wage enhancement and pay equity salary grants funded by the Ministry of Community and Social Services flow through the centre to the staff. If you choose to include salary grant revenue in your budget then you must also include in expenses the related amounts paid to staff. You can also choose not to include both the salary grant revenue and the related salary expenses in the budget. The net effect on the excess of revenue over expenses for the year should be nil using either method.

Other income

A centre with approximately 50 children typically generates annual revenue in excess of $250,000. Revenue from fundraising, donations, interest and GST rebates is seldom greater than 1% of the total. Consequently, don’t waste time estimating income from other sources. This is not to imply that other income is not important, just that for budget purposes you should estimate it quickly and move on to the next area.

The following table outlines an estimate of annual revenue. Estimates should be updated periodically for changes as necessary.

Estimating expenses for the year

All not-for-profit organizations have a myriad of expenses including salaries and related costs, rent, play supplies, food, office supplies, insurance, etc. The task of estimating expenses can be daunting at first. To make the task more manageable focus your efforts on estimating the most important items. Areas of less financial significance such as office supplies and travel costs can be either lumped together or quickly estimated individually.

Salaries and benefits

Salaries and benefits typically comprise between 70% and 90% of the expenses of most service organizations. A mistake here will throw off the whole budget. You should spend most of your efforts estimating these expenses.

Estimating gross salaries is relatively straightforward. List all of the staff positions at the centre and estimate the gross salary for each position for the upcoming year. For staff paid an annual salary you should refer to Board approved salary levels. For staff paid on an hourly basis you will have to refer to approved rates and estimate the number of hours likely to be worked by staff in that position during the year.

Remember to include vacation pay costs including those for hourly paid positions. Some centres running a ten month operation pay staff vacation pay at the end of the school year. You must factor this annual payment into your forecast if it is applicable.

Replacement staff

Absent staff must be replaced to maintain minimum required staff to client ratios in childcare centres, youth hostels, shelters and other care giving organizations . You must factor into your budget the cost of hiring these replacement staff. A guideline we have found useful is to assume that you will require five weeks of replacement staff for each permanent position. (Typically if staff take two weeks vacation a year then they are sick for three weeks. If they take three weeks paid vacation a year they are often sick for only two weeks). As each week represents approximately 2% of the annual salary budget you could estimate an even 10% for replacement staff.

Take into account the specifics of your organization and its replacement staff experience. Some unionized centres require significantly higher levels of replacement staff and other centres require lower levels as staff are required to take vacations at times when client service levels (e.g. child enrolment) are low.

Estimating staff benefits

Statutory benefits can currently be estimated at 9.16% of salary costs.

Canada Pension Plan (CPP) and Employment Insurance (EI) are payable only on amounts up to statutory maximums. Employer’s Health Tax (EHT) is charged on a sliding scale and will be reduced for the next three years [see Volume 1 Issue 6, p23]. Worker’s Compensation rates often vary from centre to centre for reasons we have difficulty comprehending. For the sake of simplicity we recommend that you apply a straight 9% of gross salary as an estimate of all statutory benefits. 

Non-statutory benefits should be estimated at twelve times the monthly premium currently being paid. In the absence of actual information you could use 4% of gross salaries as an estimate.

Salary grants

Provincially funded salary grant payments to staff should be included in an amount equal to that included in your revenue estimates.

By putting all of the pieces together you can estimate total salary and benefit costs for the year as follows:

Food costs

Food costs are typically the second highest expenditure of a childcare centre’s operation. They usually vary between 5% and 10% of total expenses. One way to estimate the cost of food is to determine what was spent in the prior year and, in the absence of program changes, estimate the same amount for the upcoming year. Costs for centres preparing their own food are typically between $1.60 and $2.00 per child per day excluding staff time. Costs for those centres using catering services are typically between $3.00 and $3.60 per child per day.  

Remember that food costs are small in comparison with salaries. If you are off by 20% in your food budget it will result in a variance of about 2% of total expenses. Compare this to staff costs where an estimating error of 20% will result in an 18% variance in total costs.

Other expenses

Other expenses can be based on prior experience and current Board expectations. We frequently advise Boards to only estimate individual expense categories expected to exceed $4,000 per year (e.g. play supplies). All others categories could be lumped into an "other" category which can be estimated based on past experience. "Other" expenses can typically be estimated at approximately 8% of total annual expenditures.

Pulling it all together

Summarize the revenue and expenses budget (see table below) and determine whether the budget achieves the objectives of your organization. If your budget predicts a deficit when a surplus is required then you will either have to reduce expenses (typically this requires a reduction of salaries and benefits) or endeavour to increase revenue by either boosting enrolment or increasing parent fees.

Budgeting monthly cash flow

Preparing a budget of annual revenue and expenses is important. However, because of fluctuations in monthly revenue and expenses throughout the year you could run out of money in August even though your annual budget shows you will still be solvent by the end of December. Centres can experience significant fluctuations in outlays for salary and benefits expenditures (e.g. months with three pay periods). Also, timing of certain receipts such as Direct Operating Grants (received quarterly) may not coincide with the respective payments (salaries paid out by-weekly). Consequently, a large cash balance in the bank may not necessarily indicate financial health several months down the road.

For most childcare and shelter related organizations preparing a twelve month cash flow budget is not a difficult exercise. Start by dividing your annual estimate of revenue and expenses into twelve equal monthly amounts (ten if you don’t operate in the summer) and then adjust each of the line items for monthly fluctuations. Consider:

Monthly revenue variations

·         Adjust monthly revenue for anticipated changes in enrolment and/or fees to be charged. For example, adjust March and December if additional fees are charged during school holidays and adjust July and August if you anticipate significant enrolment declines or changes in the summer fee structure.

·         Be sure to take into account the timing of parent deposits. Budget for collection of deposits/last month’s fees in the month received and, equally importantly, adjust cash to be received downward in the month that these deposits will be paid back or credited to fees. This is especially important for ten month programs where the first and last month’s revenue is received in September and no cash is received in June.

·         Salary grants are usually received in January, April, July and October.

·         Consider leaving "other revenue" out altogether unless it is either predictable or expected to be significant.

·         Allow for timing differences in collection of government fee subsidies in situations where you have less than a full year program or you experience significant monthly enrolment changes.

Monthly salary and benefit variations

·         If staff are paid on a bi-weekly basis then ensure that you allocate 20 of the 26 annual pay periods to 10 of the months and 6 of the 26 to the remaining 2 months. Use a calendar to determine which months will have three pay periods. If you don’t do this you will receive a nasty surprise when, twice in the year, your monthly payroll is a full 50% higher than expected.

·         If salary grants are paid out quarterly then ensure you record the timing of the payouts and related statutory benefits accordingly.

·         If you run a ten month program record vacation payments in the period they will be paid out.

·         Receiver General payments are larger in the month after large payrolls (e.g. three pay period months and months with lump sum salary grant payouts).

Other expense variations

·         Record one-time annual expenses such as insurance, audit, large capital asset purchases and renovation expenses in the appropriate months.

·         Allow for additional trip, activity and play supply expenses in December, March and the summer months if appropriate.

Once you have split annual expenses into their monthly slots make sure you tie them into the actual cash balance of the centre. An example of a monthly cash flow budget is as follows:

The above budget format readily lends itself to being produced on a computerized spreadsheet such as Excel and Lotus 1-2-3. The spreadsheet makes it easy to adjust the forecast for changes in enrolment levels and expense assumptions .

The advantage of a monthly cash flow budget is that you can anticipate serious cash problems throughout the year and act in advance to prevent a surprise dip in bank balances. Again, it is essential to update the monthly cash flow budget on a regular (quarterly) basis as a budget is only as good as the accuracy of its assumptions. It is the responsibility of the Board to review the monthly cash flow budget on a regular basis and make adjustments whenever necessary.