There are as many forms of nonprofit budgets as there are forms of organizations. Unlike financial statements, which have some rules and guidelines according to accounting standards, the same level of industry-imposed standardization for budget documents and formats doesn’t really exist. While it’s true that the look of the budget should vary according to the structure and function of the individual organizations, there are some best practices that all organizations should use when building their annual operating budgets.
- Involve the Spenders
Given that a budget is a plan to earn and spend money throughout the year, the various people who make purchases and incur expenses should be involved in providing information to build the expense side of the budget. Even the financially or programmatically smallest nonprofits—often operated entirely with volunteers—have their knowledge of costs spread across two or more people.
When involving the spenders, ask the following questions:
- What do your program or direct-service staff anticipate for supply costs, event space, contracted personnel, pass-through funding or sub-grants, and any travel?
- What new or expanded activities and services are planned?
- What do the marketing and development teams anticipate for cost of postage and printing, digital advertising, and expenses for fundraising events?
- What will you pay your outsourced accountant and other consultants?
- Will any registration, merchant, legal, subscription, software license, or other fees change (or be added) during the budget year?
Some other considerations might include:
- If you have employees, calculate the cost of benefits in consultation with your brokers and carriers. Plan for cost-of-living adjustments in keeping with your local market.
- Ask your broker about any increases in property & casualty insurance you might experience next year.
- If you have vendors, ask them directly for estimated costs in the coming year.
- If you lease office space, office machinery, and/or vehicles, check with the lessors on the rates and fees for the next lease renewal.
Additionally, think about organizing your budget document to group together expenses and expense areas that are the responsibility of each manager. This organizing principle will help to track spending against your budget throughout the year and allow managers to identify what flexibility is available to them for mid-year adjustments.
- Involve the Fundraisers
A key note of caution: don’t simply add up all the spending and then copy that number to the revenue side of your budget.
As with involving the people doing the spending, get the people responsible for soliciting and stewarding donations together and identify the pledged gifts, the probable gifts, and the potential gifts.
Additional items to be attentive to:
- Pledged gifts can be budgeted at face value.
- Gifts with other degrees of confidence should be budgeted proportionately to the confidence level: perhaps 50% for probable gifts and 25% for possible gifts.
However—and I can’t caution this enough—avoid the temptation to over-project gifts, especially from new or newer donors. It’s better to be pleasantly surprised when that new donor does renew at the same level than to be unpleasantly surprised that only two of last year’s five new donors renewed at all. Having a formula, such as budgeting 25% of last year’s new donors’ total gifts, protects against such overconfidence.
Some nonprofits also have earned revenue and an analogous process will work for that portion of the revenue side. Use confidence-level percentages as shown above to budget for the renewal of new versus long-term paying customers and clients.
- Involve the Grant Writers
Whoever does the grant writing will inevitably need some form of the budget to accompany most applications. Many foundations and most government agencies will have detailed rules about what can and cannot be included in a proposal budget.
Take time to organize the budget document to make it easier for your grant writer(s) to extract the necessary allowed expenses. For example, if the grant writer reports that many foundations will fund program event space but will not fund any food provided at the event, have separate line items for the two types of expenses.
Also, because certain grants will be restricted to certain program areas (rather than general operating support), organize the budget so that each program area’s cost is easy to eyeball. Then you can advise your grant writers what areas need more (or less) funding so that grant prospecting is more efficient.
There is a point of diminishing returns here: don’t adopt so much of the grantors’ templates that you nullify the manager-facing structure of your expense categories. However, looking to the granting organizations’ guidelines and templates might help to begin crafting that manager-facing structure.
- Include a Contingency Line
To an earlier point: a budget is, in essence, a plan. No plan, least of all that of an organization attempting to address real-world issues through charitable means, can escape unforeseen developments. The proactive tactic is to make contingency plans.
Within the context of a budget, proactivity means incorporating a contingency line item. Even the most detailed research into anticipated costs can’t account for all economic and market variables. If your organization does any kind of travel, sends mail, or has any kind of event involving catering, your actuals will certainly vary from your budget.
Guard against these variances negatively affecting your bottom line by including a contingency line to capture those variances. It doesn’t need to be large—even for a seven-figure operating budget, 1% of the total will suffice—but the key is not to treat it as a miscellaneous expense account.
Still, be careful—don’t allow yourself or your managers to think you have an extra 1% to spend on this event or that project. The contingency line is there to offset against the truly unknowable expenses, not to be lumped into another pre-existing project or expense.
- The Budget’s Bottom Line Should Be Positive
Not negative. Not even break-even. But positive. Budget to have a surplus.
This is not just a second contingency line. As previously mentioned, the contingency line is about preparing for the unexpected within the budget year. In contrast, the budget-to-surplus practice is about looking to the future to ensure your organization’s long-term sustainability.
Yet like the contingency, the surplus doesn’t have to be large: 1-2% of the total expenses is a fine target. If this is a practice that your organization hasn’t used historically, start smaller—perhaps at half a percent—and build to that target over a few years.
What this practice says to your stakeholders, both internal and external, is that you know your mission will still be relevant after the fiscal year. This surplus can then go into your cash reserves (ideally a money market or other savings account that earns a bit of interest) and be available for the following years’ liquidity needs during slow revenue periods.
In the long-term, these surpluses should accumulate until it’s time to make your next capital investment as part of expanding your work.
Budgeting for Success
Budgeting is a time-consuming but necessary process. Unfortunately, it often excludes people outside an organization’s finance team. Similarly, the budget is often too focused on the present knowns without regard for the unknowns or the future.
To counteract such challenges, you can use these five best practices to make your annual operating budgets more useful to all your stakeholders. In doing so, you can position your organization for success in your next budget year and beyond.
Eric Joseph Rubio is an experienced nonprofit management professional who has held finance and operations management roles with nonprofit organizations in Illinois, Florida, and presently in Washington, DC. He has served on grant panels and auxiliary boards and is a freelance writer across a variety of platforms. Eric is a graduate of Wheaton College (Illinois) and lives in Arlington, Virginia. ericjrubio.com
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