Proper Nonprofit Budgeting

Somewhere in time it became standard practice for nonprofit organizations to plan a balanced budget for their upcoming fiscal year. I don’t know where that came from, but can we please send it back?

Ask any small business owner and they will tell you that the bottom line matters. They’re looking to be profitable in their year. They want their budget to indicate sustainability and growth. They’re ok with expenses going up as long as income increases even more.

I encourage nonprofit organizations to adopt this mindset as well. How will your nonprofit be able to serve your community next year if you aren’t making money? Your annual budget should be a reflection of your growth plans, your program development, and the increased impact you plan to make in your community.

Here are a few examples of things I encourage you to STOP doing to your nonprofit budget:

·        Stop purposely making your income and expenses equal – for two basic reasons. If you spend one dollar too much or bring in one dollar too little, you’re now operating in the negative. Who will cut that check at the end of the year and “save” your organization? A net zero budget doesn’t allow you any reserves (profit), that cushion you may need to get through the year or to give you a head start for next year.

·        Stop looking at where you can cut costs – no more shoestring budgets! The sign of a healthy organization is one that requires additional spending year after year. Things cost more AND you should be growing, not shrinking.

·        Stop hiding income in your budget. I’ve had nonprofit leaders explain to me that they don’t include ALL the income they expect in a year in their budget because they’re afraid if they look to “rich” people won’t donate to them. The opposite is actually true – people are MORE likely to donate to organizations that are showing that they’re doing well and LESS likely to donate to an organization that isn’t financially stable.

Your nonprofit budget should show what I call “the true cost of doing business”. When I review your annual budget and have questions, none of the answers should reveal “other” income or expenses that aren’t reflected on the page. Here is a list of GOOD nonprofit budget practices I highly recommend you implement immediately:

ü  Every expense and every income dollar anticipated over the next year should be included, even in-kind items. Just because someone gave it to you for free doesn’t mean that it isn’t an expense you should prepare for or that it isn’t income you’ve received. Not accounting for in-kind. In-kind contributions net out to zero in your budget; they increase your income by the same amount they increase your expenses.

ü  Income AND expenses should be included in the budget. I’ve seen organizations that merely come up with a list of expected expenses and decide that’s their budget; that’s the amount of money they aim to fundraise over the year. This is a poor plan for several reasons, including that it’s not really a plan at all and will likely lead to falling short and having to either downgrade or cancel programs or rely on a stakeholder to cut that big check at the end of the year to “save” the organization.

ü  Every year, your budget should increase. Expenses should go up, and so should income. If you aren’t showing historical and future growth, then you appear to be stagnant thereby turning off would-be major funders who will likely ask to see three years of your financial statements.

ü  Your budget should reflect what’s in your Strategic Plan. When creating next year’s budget, don’t forget to review your Strategic Plan and incorporate any income and expenses related to activities defined there for your upcoming year.

ü  Before stepping forward, don’t forget to take a look backward. I highly recommend creating a Variance Report (to assess how well your organization did last year in reality compared to that year’s budget. Knowing where the greatest variances are may help you shape next year’s budget in a more realistic way.

ü  Board-approved spending should also be included. Things like staff salary increases, purchasing new computers/technology/equipment, relocating to a better office setting, etc. should show up in the budget. I’ve had Executive Directors tell me they always make the staffing/payroll line the same every year because they’re afraid their board will be offended by their “brazen attempt to get a raise”. Which reveals a lot about the dynamics of those organizations, sadly, but I feel that the opposite is likely truer – without raising that amount each year your board is likely to take the position that they can’t give anyone a raise because it isn’t in the budget. It may be helpful to have the ED and executive committee (or budget committee, whatever is appropriate for your organization) sit down before the new budget is prepared and talk about administrative spending that’s needed in the following year and agree on items the ED presents.

ü  Be forward thinking, growth minded BUT reasonable. Make sure your figures are realistic. I’ve seen many organizations significantly overestimate income. It isn’t realistic that you’re going to apply for 20 new grants next year and win them all. It isn’t realistic that your end-of-the-year campaign letter will go out to 1,000 households asking for $100 and that they’ll ALL do it. It’s also not reasonable to expect that you won’t spend more in rent, utilities, or other administrative costs, no matter how skilled you are as a negotiator. Don’t assume you can spend less just so you can make your budget look better.

ü  Get more eyes! Before presenting the budget you’ve prepared to the board, ask another staff or board member to review the budget. They may be able to catch math errors, transposed numbers, or items that just stick out that you’ve not noticed.

Hopefully you have a budget process in place that helps you prepare your annual nonprofit budget in a timely and consistent manner each year. If not, I would highly recommend adopting one and making sure each person knows their part in the process – what they need to do and what their deadline is. Until you’ve consistently achieved good budgeting practices and feel confident in creating annual budgets each year, it may be helpful to have a consultant review your budget, help establish the process and train your team to ensure seamless implementation.