How to Perform Budget Analysis Effectively (Tools & Tips)

A well-timed mid-year budget analysis can be a game-changer for your organization, helping you avoid the risk of overspending on one program while another runs short of funds. It allows you to make strategic changes that keep your budget balanced, support your goals, and bring you closer to fulfilling your mission. 

In this guide, we'll explore what budget analysis is and how it can help you make better financial decisions. We'll also discuss the best methods and tools to help you complete the process effectively.

When it comes to the best tools, Martus offers a transformative cloud-based budgeting, forecasting, and reporting software specifically designed for nonprofit and faith-based organizations. 

We make your budgeting analysis a breeze, integrating seamlessly with your trusted accounting systems to provide better financial transparency. You can also collaborate across departments to uncover real-time insights for informed decision-making. 

Book a personalized demo today to get started. 

What Is Budget Analysis?

Budget analysis is the process of reviewing and assessing a budget to determine how actual income and expenses align with projected figures. 

The analysis compares actuals vs. budget, identifies gaps in them, and offers insights for various decisions, such as adjustments, changes in spending patterns, or reallocations. 

Budgeting analysis also helps identify underspending or overspending by highlighting areas where you spend less or more than you have budgeted for, allowing for early intervention.

For example, once you identify an underspend, you can decide to reallocate unused revenues from one expense category to another, depending on real-time needs. 

Remember: Good budget analysis is not only for large nonprofits. Every organization must perform it to improve program impact, avoid deficits, support decision-making, and promote financial accountability. 

Benefits of Conducting Regular Budget Analysis

Budget analysis offers the following advantages:

• Improved Forecasting: You can see how actual results compare with your set budget, which helps you revise and refine future budget forecasts to prevent surprises. 

• Increased Budget Accuracy: When you track expenses against your budget figures, you identify areas of improvement and early interventions to prevent financial problems from escalating. You can locate budget variances and areas where your projections were inaccurate, allowing you to refine your budgeting process for greater accuracy in the future. 

• Improved Overall Financial Health: Through the enhanced financial analysis and budgeting control, you can enjoy better financial health. You build credibility with funders because of the transparency and accountability, which leads to increased funding. Reporting to the board is also easier once your financial management is accurate and compliant with the expectations of donors or grantors. 

• Organizational Agility: With regular budget analysis, you can adapt and respond more effectively to internal and external changes. It becomes easier to adjust your nonprofit budgeting to meet changing revenues and expenses, as well as industry norms, while remaining stable and focused on your mission. 

• Strengthened Grant Performance Tracking: The analysis helps you monitor how you use grants, comply with grant terms, and highlight spending excesses or gaps. 

Budget Analysis Methods

From variance and impact analysis to benchmarking and trend analysis, you can use several internal and external techniques to analyze your nonprofit budget. 

Let’s check out the main methods:

• Budget Variance Analysis: Here, you can compare actual financial outcomes with your budgeted amounts to see any deviations from your plan and find out the reasons for the deviations. For example, if your actual expenses are lower than what you budgeted, look for areas where you underspent resources and why. 

• Budget Impact Analysis: Using this method, you can evaluate how certain decisions or changes, such as new programs or policy shifts, affect your overall budget in terms of costs and resource allocation. It helps you see what budget lines will be affected and assess trade-offs, such as cutting one project to fund another. 

• Comparative Analysis: This method compares actual financial figures with budgeted amounts across various periods to identify potential issues or areas for improvement. 

• Trend Analysis: Budgeting trend analysis involves reviewing financial data over a specific period to identify trends and patterns. These can indicate the direction your nonprofit finances are heading and the magnitude of changes in different budget categories. 

• Scenario Analysis: In this method, you create and analyze different budget scenarios or assumptions to test how robust and sensitive your budget is to external and internal factors. You can even use scenario analyses to create response plans for the differences you discover during variance analysis. 

• Benchmarking Analysis: You can compare your budget with those of other similar nonprofits, if available, to evaluate how yours performs relative to others. The method helps you discover the best nonprofit financial management practices and areas where you need to improve. 

Since each method has its advantages and shortcomings, you'll want to start simple and scale as your needs grow. As your organization becomes more complex, combine different methods for more accurate results and effective decision-making. 

How to Perform an Effective Budget Analysis

Next, let’s look at the steps to analyze your nonprofit budget accurately:

1. Gather All Financial Data: Collect all the financial data (expenses and revenue) for the period under review. You can pull this data from your spreadsheets, accounting software, or dedicated nonprofit financial management software. 
2. Compare Actuals to Budget: Compare the actual figures against your budget amounts to identify variances within that period. 
3. Investigate Variances: Analyze the reasons behind the variance you've identified. Consider factors such as internal inefficiencies and changes in government regulations. 
4. Discuss Insights: Based on your variance analysis, propose actionable recommendations for better budgeting and financial management in the future. You can raise more funds, adjust spending, optimize how you allocate resources, or revise budget assumptions. 
5. Share Your Results: Communicate your findings, insights, and recommendations to the relevant stakeholders to promote transparency, accountability, and collaborative decision-making. 
6. Act on the Recommendations: Use the insights and recommendations from the analysis to inform future budget plans to ensure they are more realistic and aligned with your organization’s goals. 

When analyzing your budget, it's essential that the finance team collaborates with program leads and top managers to ensure an inclusive, more accurate process and result.

Additionally, you'll need the right tools to perform a practical budget analysis. 

Martus can automate data pulls from your integrated accounting software, track variances, and provide the visual reports you need to showcase to your leaders and the board. 

Streamline your budget analysis process with Martus now.

Budget Analysis Examples

Analyzing your budget can be confusing, but it doesn't have to be.

Let's check out some nonprofit budget analysis examples using realistic scenarios:

Example 1: A Food Pantry Overspends on Transportation

The Problem: A charitable organization that supports its local community with groceries has exceeded its transportation budget by 40% before the end of its financial year. 

The Causes: The organization discovers that fuel prices were higher than expected. Also, the delivery vehicles had to cover longer distances to meet growing needs. 

Insights: The team came up with the insights below:

• The budget assumed stable fuel prices, but they rose unexpectedly. 
• The organization had to source food from more distant suppliers because of local shortages. 
• There were no adjustments to reflect the increase in delivery volume and the associated cost per mile. 

Recommended Action:

In the short term, the team recommended reallocating excess funds from less time-sensitive budget items, such as training, to cover the transportation gap. 

The team also proposed long-term solutions, such as updating the organization's budgeting models to include variable cost forecasting including fuel index tracking. 

They also suggest that the organization plan deliveries more efficiently or co-share transportation with nearby food banks. 

Example 2: Underspending on a Youth Program Due to Volunteer Shortages 

The Problem: A youth mentorship program has only used 50% of its budget after nine months, down from an expected 80%. 

The Cause: The organization didn't recruit enough volunteer youth mentors, leading to fewer sessions than it had planned. 

Insights: The team generated the insights below:

• The program relies heavily on volunteers to deliver mentorship services. 
• There was poor volunteer engagement due to recruitment shortfalls and conflicts during planning sessions.
• The underspending shows unmet objectives rather than a successful savings system.

Recommended Action: 

The team recommended redirecting more of the unused funds to a volunteer recruitment campaign with stipends and flexible training options to attract and retain mentors. 

For the long term, they recommended incorporating risk contingency in future budgets for programs that depend on volunteers. 

The organization could also do well with a hybrid model that combines both volunteer and paid mentors. 

Our Favorite Budget Analysis Tools

While you can use simple tools like Excel and Google Sheets for budget analysis, you'll be limited in what you can do. 

You also outgrow spreadsheets easily as your organization grows and requires more complex solutions, such as analyzing multiple budgets simultaneously. 

In such scenarios, more advanced and specialized tools come in handy for creating budget templates, tracking funds, performing calculations, and analyzing your budget. 

Here are the top three tools for budget analysis:

1. Martus 

As specialized cloud-based budgeting and forecasting software for nonprofit organizations, Martus helps you simplify financial management, including budget analysis. 

Martus's capabilities include:

• Integrations: Martus integrates with your ERP and favorite nonprofit accounting software to automatically pull financial data for advanced budgeting, forecasting, and reporting. 

• Collaborative Workflows: Martus provides collaborative worksheets to ensure that each department's budget integrates seamlessly, allowing you to create a comprehensive, organization-wide budget summary. 

• Unlimited Budgets: You can create unlimited budgets, which is ideal if you have multiple program budgets or when you need to simulate numerous situations for effective scenario analysis. 

• Periodic Budget vs. Actuals Comparisons: With Martus, you can automatically get monthly and multi-year budget vs. actuals in real time. The analysis includes variance and percentage variance for each month, as well as multi-year grant tracking. 

• Real-Time Insights: Martus unlocks real-time insights to help you make data-driven decisions with confidence. 

• Real-Time Dashboards: You get access to customized dashboards that help you uncover the story behind your finances for accurate and audit-ready reporting. You can also get forecast reports that compare the remaining months in your fiscal year to the annual budget to highlight key anomalies and help you reforecast early. 

• User Permissions: Martus provides role-based access and lock controls to ensure that each budget worksheet is visible to the correct owners and approvers, preventing accidental changes to approved ones. 

If you want to simplify budgeting and reporting and break interdepartmental silos, reach out to us today. 

2. Sage Intacct 

Sage Intacct has tools for budgeting, forecasting, and financial reporting with capabilities such as:

• Budget Tracking: You can use Sage Intacct to manage and track budgets at a granular level based on grants, programs, and other dimensions. 

• Budget Variance Reporting: Sage Intacct offers real-time reporting systems that track budget variances, enabling you to make adjustments promptly.

• Scenario Planning: The software allows you to model ‘what if’ scenarios to help you prepare for different situations. 

3. Xero

As a budgeting solution, Xero is ideal for small nonprofits and has capabilities such as:

• Fund Tracking: Xero allows you to track your finances and produce accurate accounting reports that support decision-making. 

• Budget vs. Actuals: You can apply formulas to compare budget vs. actuals and spot deviations in time. 

• Cash Flow Management: Xero has a financial dashboard for recording donations, grants, and expenses to help you keep track of cash flow. 

Budget Analysis Best Practices

In addition to the above software, you can apply these best practices to analyze your budget accurately:

• Monthly and Quarterly Analyses: Review your budget monthly and quarterly to catch and address anomalies early, before they turn into full-blown financial crises. 

• Involve Program Leads: Include all your program managers in the review process to secure their ownership. Their input also enhances data accuracy because they have hands-on interactions with their program budgets and can easily relate them to the overall organization budget. 

• Document and Share Findings: The review process won't be complete if you don't share your findings and recommendations with top leaders and the board. For this to happen, you'll need clear documents outlining your process, results, and proposals. 

Frequently Asked Questions (FAQs)

Have additional questions about budget analysis for nonprofit organizations? We’ve got the answers you need:

How Does Budget Analysis Differ from Budget Planning?

Budget planning creates a roadmap that shows the expected revenue and expenses for a specified period to help you set financial goals and allocate resources effectively. 

On the other hand, a budget analysis evaluates how this roadmap performs in real life. It identifies variances, understands the reasons behind them, and helps make the necessary adjustments to the budget. 

Who Should Be Involved in Budget Analysis?

Your budget analysis should include financial and non-financial stakeholders such as financial analysts, budget managers, accountants, program leads, project managers, and top executives. 

At the apex, it should include your board of directors, who review and approve the recommendations based on the organization's overall financial strategy. 

How Often Should You Conduct a Budget Analysis?

Ideally, you should conduct a budget analysis at least monthly to monitor cash flow, highlight significant budget vs. actuals variances that require attention, and identify emerging trends. 

You can even do weekly analyses in times of crisis. 

Quarterly and annual reviews are ideal for monitoring overall financial performance, reviewing grant budgets, comparing the budget to actuals, and informing the following year's budget. 

What Are the Signs of a Poor Budget Analysis Process?

You can tell that your budget analysis process is poor if you observe the following signs:

• Poor fund allocation for a similar project. 
• Stakeholders lacking clarity on the budget variance (overspending or underspending isn't explained adequately).
• No corrective measures taken after the analyses. 
• Inconsistent or delayed reporting, including unclear summaries.
• Impractical recommendations to the leadership and the board. 

Conclusion

Regardless of the size of your organization, an effective budget analysis is essential for making better decisions, promoting transparency and accountability, and strengthening your nonprofit's overall financial health. 

You can use nonprofit-friendly financial management and accounting tools to streamline your budget analysis workflows. 

At Martus Solutions, we offer dedicated nonprofit financial management software to help you sync data automatically from your accounting software and review multiple budgets simultaneously. 

You can also compare budget vs. actuals every month and uncover practical insights for timely budgetary adjustments.

Request a customized demo today to learn more about how Martus can improve your overall financial strategy.