Chippewa Watershed Conservancy: Not-for-profit Budgeting
Case I: Line-item and Cash Budgets
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 3,557 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.
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 10%. Contributions will increase by 20% due to new membership drives. Grants will fall by 30% due to the end of a current grant. Interest income will be unchanged from the current year. Endowment income will be down 20% due to low interest rates as some endowment assets roll over to new maturities.
Expenses: 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
Special Events $12,000. 1st qtr. 20%, 2nd quarter 50% and 3rd quarter 30%
Contributions $40,000. 1st qtr. 20%, 2nd qtr. 20%, 3rd qtr. 10%, 4th qtr. 50%
Grants $40,000. 4th quarter 100%
Endowment Income $4,000. 25% each quarter
Interest Income $400 interest on operating fund (.25% prev. qtr. ending bal.)
Total Revenue $96,400.
Travel $4,000. 1st and 2nd quarters 20%, 3rd quarter 35%, 4th quarter 25%
Special Events $7,000. 1st quarter 20%, 2nd quarter 50%, 3rd quarter 30%
Conferences $2,000. 3rd quarter
Fundraising $6,000. 1st quarter 20%, 2nd quarter 30%, 4th quarter 50%
Insurance $4,000. 1st quarter
Newsletter $5,000. 25% each quarter
Postage $3,000. 25% each quarter
Professional Fees $5,000. 1st quarter 40% and 20% each remaining quarters
Publicity $1,000. 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 $2,400. 25% each quarter
Total Expense $85,200.
1) Prepare a line item Operating Budget for the following (next) year using the Current Year numbers and the assumptions about changes in individual line items. You will find that this, and subsequent questions, can be answered more easily if you prepare your work in a spreadsheet.
a) Calculate the CWC’s surplus or deficit for the current year as a dollar amount and as a
percent of annual expense i.e. Surplus/Annual Total Expense.
b) Without much information about the organization, does any ONE expense seem
unusually high / low during the current year?
c) Use the assumptions concerning changes in the various revenue and expense line items to
calculate the CWC’s surplus or deficit for the next year as a dollar amount and as a
percent of annual expense.
d) Does the budget for the next year meet their goal of a 5% (percent of annual expense)
e) Calculate the amount they need to cut (or have as an extra surplus).
f) 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 .25% each quarter based on the beginning of quarter cash balance (.0025 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?