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How to navigate a budget shortfall

The great recession has had vast, and, in many cases, lingering effects on the overall economy and on the nonprofit sector.

As such, many nonprofits are faced with rarely experienced circumstances. One such circumstance is the budget shortfall. A budget shortfall, otherwise known as a deficit, or an unfavorable variance, occurs when actual costs are greater than budgeted costs. This can be alarming. The question then becomes: what should one do in the event of a budget shortfall? Consider these two courses of action:

If the unfavorable income variance is not significant and
covered by an equal or larger favorable expense variance:

The executive director and board usually agree to continue to moni­tor closely the income and do not take any further action or prepare a revised budget.

If the unfavorable income variance is significant and
NOT covered by an equal or larger favorable expense variance:

The executive director will propose action that the board will review and approve. It may be decided that the income shortfall will be covered by reserves. Alternatively, there may be proposed changes in de­velopment plans and/or expenses. Depending on the action taken, the staff may propose amendments to line items or revise the entire bud­get. The board will need to approve any amendments or revisions.

Whenever there are material budget variances, the staff should provide the board with explanations and the board should review such explana­tions for reasonableness and to determine what further action, if any, should be taken.

Shelley Parnes is a CPA with over 20 years of accounting experience, providing independent accounting and consulting services to nonprofits and small businesses.

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