Nonprofit Budgets Have to Balance: False!
There are some good reasons why nonprofits sometimes have deficit budgets, that should be left that way. Find out why.
Article Highlights:
When is it okay not to have a balanced budget?
As nonprofits serving people and communities in these difficult financial times, we don’t expect things to turn around for our communities in the near future. Many of us are wondering: how can we achieve a balanced budget in these times? When is it okay not to have a balanced budget?
A potentially harmful habit practiced in many community nonprofits is presuming that a break-even budget is mandatory. Board members and staff may be under the influence of the false but persistent ‘nonprofits can’t make money’ myth as they develop the year’s income and expense plan. Like other conventional wisdom, the balanced budget is based on sound concepts, but can become unnecessarily constricting.
Instead of “How can we make the budget balance?” the annual budgeting cycle should begin with the question, “What financial outcome does our organization want or need this year?” Different scenarios lead to different decisions about what the budget’s bottom line should look like:
1. The surplus budget
1. We need to increase reserves or pay down debt: adopting a surplus budget. When the organization’s leaders decide that its cash and other reserves are lower than ideal, the organization can plan to generate more income than expenses, creating surplus funds that can be used in future years. A surplus may also be needed to provide funds for paying down debt or for easing cash flow.
The board should direct staff to develop the draft budget by determining realistic income targets that nonetheless outpace expenses. If the organization can deliver on a surplus budget, it will have higher net assets (net worth) at the end of the year, and enjoy a stronger financial position.
2. The break-even budget
We can’t gain ground now, but we can’t lose ground either: the break-even budget. Typically, organizations choose break-even budgets by default and the skin of their teeth. A first cut on the budget shows expenses much higher than revenue, so the staff then tries to figure out how to increase the revenue number (but still stay close to reality) and decrease the expenses (but not damage programs).
The staff and the Finance Committee tack their way towards a break-even budget, and hope that their cautiously optimistic projections work out.
3. The deficit budget
There are three typical reasons for adopting deficit budgets. First and rarest, the organization’s leadership decides that its cash and other reserves are more than sufficient, and so spending some of those reserves in the coming 12 months is a good idea.
They may choose to make one-time purchases or expenditures, or to give the staff one-year, non-permanent raises. At the end of the year they will have more expenses than income for the year, and thus a deficit for the year.
A second reason for a deficit budget is a decision to invest. For example, the organization may invest funds in strengthening its fundraising capacity, or in new programming. Leadership believes that resources from previous surplus years can be risked as investments in future programmatic or financial paybacks.
An all-too-common third reason for adopting a deficit budget is a decision that ending the year in a worse financial situation is the lesser evil. For some organizations, simply cutting costs may not be the right financial decision. For example, in an organization that relies on earned income, cutting staff will result in lowering income.
The leadership will need to re-work the way its services are structured — perhaps too complicated to do in just a month or two. Or an organization may be in executive transition, and the board believes that the dip in revenue is due to the absence of an executive director, and expects that income will go up again. They decide simply to “bite the bullet” this year — and they believe they can afford it.
At the end of a deficit budget year — assuming that reality matches the budget — there wil be a lower net worth and the organization will be in a financially weaker position. But “weaker” should be in quotes because a planned loss may, in fact, be a sound, strategic fiduciary decision by a board. For example, investing in a new website may mean a deficit this year, but could reap substantial gains in fundraising in coming years.
The core issue is intentionality. An unplanned deficit reflects an error in planning and/or execution, while a planned deficit is an investment of accumulated reserves for the benefit of the organization and its constituents.
Why nonprofits struggle to break the break-even habit
Consulting to nonprofits, I’ve come to see that one of the reasons executives struggle to break the break-even habit is that foundation grants and government contracts are typically break-even contracts. We must prove that we spent exactly what we raised. But while grants and contracts are designed to break even, organizations are not. Healthy organizations require cash reserves, which means they must generate excess cash in at least some of the years.
The majority of community nonprofits with whom I work need to build reserves. But especially as we head into recession — which classically means fewer resources and higher demand for nonprofit services — developing a credible surplus budget may prove impossible.
We may have to settle for break-even because we don’t see opportunities for income growth or expense cuts. But we’ll be settling for break-even, not aspiring to it.
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About the Author
Jeanne Bell, MNA, is CEO of CompassPoint Nonprofit Services, and consults to nonprofits in business planning, financial systems, and sustainability. She co-authored Financial Leadership for Nonprofit Executives (Fieldstone).
Articles on Blue Avocado do not provide legal representation or legal advice and should not be used as a substitute for advice or legal counsel. Blue Avocado provides space for the nonprofit sector to express new ideas. The opinions and views expressed in this article are solely those of the authors. They do not purport to reflect or imply the opinions or views of Blue Avocado, its publisher, or affiliated organizations. Blue Avocado, its publisher, and affiliated organizations are not liable for website visitors’ use of the content on Blue Avocado nor for visitors’ decisions about using the Blue Avocado website.
Question about budgets/fundraising:
We ended last year with a significant surplus due to a large individual donation one month before our fiscal year end. Thus our P&L shows a net income of $32,000. We know we’ll need these funds to operate existing programs that are in growth phases and our ED’s salary, which is the most difficult to raise through grantwriting.
On paper, it appears we are in great shape, and we’re not hurting, however, we’re coming to year’s end again and we’ve used up that surplus and are awaiting several pending grants. Individual and business donations are down.
How do we make the argument to potential funders that we’re not flush, nor are we squandering our surplus from last year?
Building nonprofit reserves is critical to your organization’s health. Having a surplus budget this year does not mean you have to have a deficit budget next year – plan for growth. The reserve funds are an asset on your balance sheet, and do not have to be "spent" the following year. This is how your organization can grow and become financially stable even in unstable times.Our budget this year has actual reserve targets – we want to put away 5% in operating reserves, 5% in facility reserves (we own two building complexes), and 5% in venture reserves. These venture reserves will build a fund from which we can plan our growth in other areas or strengthen some of our programming. This is unrestricted money that we can use for future health.My real point is that we can plan not to be broke every year!Dana
Question about budgets/fundraising:
We ended last year with a significant surplus due to a large individual donation one month before our fiscal year end. Thus our P&L shows a net income of $32,000. We know we’ll need these funds to operate existing programs that are in growth phases and our ED’s salary, which is the most difficult to raise through grantwriting.
On paper, it appears we are in great shape, and we’re not hurting, however, we’re coming to year’s end again and we’ve used up that surplus and are awaiting several pending grants. Individual and business donations are down.
How do we make the argument to potential funders that we’re not flush, nor are we squandering our surplus from last year?
Your question on how to justify your surplus to funders relates to the point Jeanne made about intentionality and how to communicate the story of your organization. It sounds like your surplus was, in fact, intentional in that you were going to use the donation to fund expenses over the following 12-month period (although it didn’t happen to coincide with your fiscal year). This is the narrative and plan you could be communicating to your funders — hopefully they will appreciate your foresight and financial management skills!
Yes, adding to Rob’s excellent response, it’s also valuable to contextualize your year-end surplus ($32,000) in terms of ‘months of reserve.’ That is, how many months of spending in the coming months does the $32,000 represent? Divide your 2008-09 budget by 12 to determine one month. It is good practice to have 2-6 months reserve depending on your situation. If you get there, you can describe it as good finacial practice and a board mandate as opposed to being ‘flush.’
Great response, Dana. Wendy, from a presentation standpoint in the near term, your annual budget as presented to your board of directors for approval can have a notes column on the far right highlighting notable things in each row. For instance, on the bottom line deficit rown, the note could read: “Intentional deficit funded by reserves.” You might also consider putting at the botton of the page a box that lists “Opening Cash Reserves” with the corresponding dolllar value you expect to begin the year with and another row called, “Ending Cash Reserves” with the corresponding depleted reserve projection your budget would yield. This way Board Members can assess whether they are comfortable with the extent of deficit spending you are proposing.
We all have wish lists. For some groups, these are well defined and approved capital expansion/acquisition plans. Surpluses enable organizations to implement non funded or under funded plans that strengthen its programs and services. As a donor, I appreciate it when the charities I support can tell me immediately how they can use surprise gifts! What really works for me is when they can articulate how many more individuals can be served!
I previously worked for an organization that put money in “deferred maintenance” every year. The money in deferred maintenance was used to buy a new HVAC unit, put on a new roof, etc. We also designated large donations like that into the next fiscal year budget. They called it deferred funding. They deferred it into the next fiscal year.
You are absolutely correct! Not-for-profits should try to achieve a surplus every year. While success is measured by more and better service, money is required to produce those services. Too many boards (and staff) don’t realize there is no legal prohibition against their organizations earning a profit. If you lose money, you won’t be able to produce any services.
You are absolutely correct! Not-for-profits should try to achieve a surplus every year. While success is measured by more and better service, money is required to produce those services. Too many boards (and staff) don’t realize there is no legal prohibition against their organizations earning a profit. If you lose money, you won’t be able to produce any services.
Thank you for this great article! I found it by doing a google search of “non profit budget reserves” and it proves to be very timely to my organization.
We will end our fiscal year with a net worth that will allow us to establish the beginning of a reserve fund. We’d also like to use a portion to boost our promotions budget in the next fiscal year. Would this mean that, all else being equal, that our budget for 0809 should be a deficit budget? Knowing that we will intentially spend reserves to pay for our planned increase in promotions spending? Do I understand that correctly?
As I’ve been working on the budget — I have been struggling with how to account for using reserve funds and have it be reflected in the budget.
Your guidance is greatly appreciated!
Wendy
This is a great article, with lots of good comments from readers. I find this especially important for small nonprofits, because those are the ones more likely not to have depth of financial and accounting expertise on their board or staff, and the ones struggling with deficits.
But regardless how much you vacillate between surplus and deficit, you must continue to focus on growing your budget (and by extension your charity). It took five years for our nonprofit to achieve a budget surplus, and I’d even venture to say that was purely by chance. But despite living hand-to-mouth during our formative years (and chewing on a lot of antacids), our budget actually grew by some 25% to 30% in each of those years; it just never broke even. Financial supporters will not write checks to a stagnating cause, so if you can accept the fact that budgets do not have to balance, you can still grow a successful nonprofit, even in successive periods of deficit. You just don’t want to do that forever.
Last month or two of has really hit our non-profit hard- and for the first time in many years (I’m founding/exec director of 22 years) I am looking at the need for significant cost reductions– the overhead/program expenses are a piece of cake compared with staff trimming-
Any thoughts on the most effective and fair means of cutting staff costs-
this is painful stuff!-
I do think we’d gotten a bit ‘comfortable’ with having enough staff to cover our programmatic needs– but this also means, for once we had attracted and kept a good group of people for our needs.
I’d welcome any feedback!
Thx.
Unfortunately, there’s really no cookie-cutter "fair" way to make staff cuts & reductions. Every situation is unique, and some of your decisions may have to be driven by personnel policies, longevity, labor agreements, etc.
That being said, I would encourage you to review the core functions of your agency and compare that to the staff you consider most productive/most valuable. Some folks will insist that you not consider individuals in your decision-making process for staff cutbacks, but I think that’s a mistake. It’s important to keep your most productive and dedicated employees in place, both from a morale standpoint and from a productivity standpoint.
The bottom line is that there’s no simple solution to painful cuts. Asking staff for their ideas about how to streamline operations is helpful, but you’ve got to accept the leadership role and make the ultimate decisions.
One final suggestion – many agencies cut back on travel and training while they’re reducing staff to show how they’re cutting corners and tightening belts. I do the opposite; if you have less staff, it’s more important than ever to make sure those staff are well-trained and appreciated. The morale boost from an offsite training will be far more valuable than the additional 15 or 20 minutes per week that not going to the training would produce.
Bill, these are such important questions. We’re working on it. Be on the lookout for our February 1 issue, "The Layoff Issue." Jan
I’m developing a Nonprofit and expect to have a surplus the first year. What is the best way to handle this money, from the donors point of view? This surplus will be our reserve,or emergency fund, but can donors live with that? Any suggestions?
SarahB.
It is not only reasonable but responsible of you to have an operating reserve and will give comfort to your board. It’s SOP and you won’t need to explain it to your donors.
An acceptable loss is all relative to how much in reserves an organization has.
Having said that, is there an ‘acceptable loss’ standard?
A simple math example for my question.
The operating budget for this organization is $1,000,000.
They have an endowement of $2,000,000.
They bring in $850,000 in donations/fundraising annually.
Thus, they lose $150,000 a year and this has been happening for many years, obviously not an ideal situation.
The need for this organizations programs are great and the simple solution is to shrink programs to match donations/fundraising.
Is there a base answer as to how long the above sample numbers should continue before somebody cuts the programs?
An acceptable loss is all relative to how much in reserves an organization has.
Having said that, is there an ‘acceptable loss’ standard?
A simple math example for my question.
The operating budget for this organization is $1,000,000.
They have an endowement of $2,000,000.
They bring in $850,000 in donations/fundraising annually.
Thus, they lose $150,000 a year and this has been happening for many years, obviously not an ideal situation.
The need for this organizations programs are great and the simple solution is to shrink programs to match donations/fundraising.
Is there a base answer as to how long the above sample numbers should continue before somebody cuts the programs?
I always suggest to my non-profits to make the budget balance to zero by earmarking most those excess profits for a cause, like if they are trying to pay down debt. Since a budget is a guess and a lot of my non-profits receive their money for individual contributors or businesses if they show a "profit" the contributors are less open to giving a contribution. Especially if they are a school organization and the economy has been so tight. Is this how you would handle it?
Negative. Said organization hasn’t received a ‘profit’ in 9 years. Quite the opposite, it’s been a six figure loss for the past 5. I think it’s a matter of us having too much staff and the community is not responding to our financial needs or our services aren’t that warranted.
Oh, please pardon the duplicate post.
I always suggest to my non-profits to make the budget balance to zero by earmarking most those excess profits for a cause, like if they are trying to pay down debt. Since a budget is a guess and a lot of my non-profits receive their money for individual contributors or businesses if they show a "profit" the contributors are less open to giving a contribution. Especially if they are a school organization and the economy has been so tight. Is this how you would handle it?
Negative. Said organization hasn’t received a ‘profit’ in 9 years. Quite the opposite, it’s been a six figure loss for the past 5. I think it’s a matter of us having too much staff and the community is not responding to our financial needs or our services aren’t that warranted.
Oh, please pardon the duplicate post.
Is there a level of unacceptability regarding a fiscal loss?
I realize it’s all relative as to how much or if there is an endowement.
Nonprofit X has $1,000,000 in total expenses for a year.
Nonprofit X brings in $850,000 in donations/fundraising.
Any interest from the endowement, positive or negative either adds to the loss or adds to the income.
Lets assume the above situation has been occuring for 7 years.
Most non profits mission’s are great and their programs are needed.
However, after what stop loss point should this organization start to cut programs/employees?
How important is it for a non-profit to complete it’s budget by year-end? We haven’t passed our budget until January for the last three years that I have been employed as executive director and I haven’t seen any problems occur because of that. In my last board meeting a couple of nights ago, a couple of members of our board wanted me to have the budget complete by the middle of November. I realize that many, if not most, for profit and maybel non-profit organizations, require budgets to be done by the end of the year, but, as I said, we have had no problems resulting from passing it in January. When I asked everyone on the board why it was important to do this, no one could come up with a real answer, I received very vague responses that basically translated to most businesses do it that way or that’s the way I or my business have always done it. All I am saying is that it seems better to have the accurate figures you would have by budgeting in January vs. two months worth of forecasted figures. I’m open to being convinced of their position, but they can’t seem to tell me why it makes more sense. Advice?
Without a budget in place the ED has no legal authority to spend money. Of course, the Attorney General isn’t going to swoop down on you on January 1 but personally I would make sure we had a budget in place even if I had to arrange a special board meeting on New Year’s Eve. My routine is to close out the 3rd quarter and use the first nine months of the year and the last three months of the prior year to give me a good baseline for projecting forward. I draft our budget in October, the board does a first review in November and we approve it in December. You can get very accurate budgets if you have a good baseline and know the constraints facing your organization extremely well. The following link discusses budgeting in more detail: http://rideon.org/pdf/Strides_ Better_Budgeting.pdf
Bryan McQueeney
Please emphasize that nonprofits should make money to exercise their fiduciary responsibility for sustainability. A healthy nonprofit should have income centers beyond grants and donations.
Great comments that are all helpful as we navigage challenging economic times. Is there a "rule of thumb" when it comes to an appropriate level of debt for a non-profit? Is there a debt ratio?
HELP….maybe I am not understanding this whole concept….I can do more than break even?
How do you justify a termination benefit for a former ED who claimed constructive dismissal and we had to settle for 70,000 dollars due to the ED not having the proper Board insurance. Last year we were able to pay 12 thousand extra to that liability, however, in applying for grants how does one justify that?Thank you
I’m president of a non-profit arts organization that has debt that is approximately 20% of annual revenues. And this year, our budget will probably generate an addition to that debt.
I’m just wondering: What is the average debt to revenue ratio for most non-profit arts organizations?
very helpfull for what i was looking for. Thanks Mike
Our non-profit raised $32K for an event in the summer of 2012; this event occurs every 2 years. After the 2012 event, we have $12K left over. We’d like to carry these $12K restricted funds (for this event only) to the 2014 event. Is that legal? At the discretion of the board? HOw would we do the accounting on that one? thanks in advance…
Very nice summary, thank you!
We are working on a budget for this next fiscal year and have a Board Member who feels strongly that we adhere to a “balanced budget”. We will have a cash carryforward from this year and would like to use the available cash carryforward for program use this year. Any suggestion on how to present a “balanced budget” and still use the cash carryforward funds?
This article is one of our on the topic. Here's another past article, Focus on the Destination, Not the Route: https://www.blueavocado.org/content/focus-destination-not-route-budget
We are working on a budget for this next fiscal year and have a Board Member who feels strongly that we adhere to a “balanced budget”. We will have a cash carryforward from this year and would like to use the available cash carryforward for program use this year. Any suggestion on how to present a “balanced budget” and still use the cash carryforward funds?
This article is one of our on the topic. Here's another past article, Focus on the Destination, Not the Route: https://www.blueavocado.org/content/focus-destination-not-route-budget
“foundation grants and government contracts are typically break-even contracts. We must prove that we spent exactly what we raised. But while grants and contracts are designed to break even, organizations are not.”
Although you made the statement above “We must prove that we spent exactly what we raised.” you did not really explain it in the context of the rest of your article. In fact your article basically says this isn’t true and yet you still made the statement.
So what type of revenue into a non-profit does not have to follow the “spend what you raise” rules annually. I realize you can be awarded a multi-year grant but it will be distributed in annual chucks. We have been able to negotiate the size of each chunk sometimes when the funding agency is flexible enough (when the money is in the bank) but not always. We have also had grant line items that could with permission be carried from one fiscal year to the next. The point being that that revenue was then removed from the current fiscal year but added to the next. So the current fiscal year balanced on less revenue and the next will presumably have to balance on more.
When does it become questionable or illegal when a board director adds significant income with no plan in place to raise those funds to a budget just to balance and then votes to close the agency for lack of funds at the end of that year. This addition was approx. 25% of the total budget needed after costs were cut and staff significantly stretched beyond being productive.
I recently assumed ED role at a small NPO ($500k) 2 months before EOFY. Of course I inherited a budget and the deficit could not be prevented. I proposed a “growth” budget for the this FY. “Growth” is used loosely because apart of the issue is that though they hired me largely because of my FD background, it had not been defined what growth would mean. So this budget attempts to shape this definition in a way that may seem aggressive because of the deficit and past FD history but only proposes a 10% growth in revenue and 7% in expenses – all towards the outcomes of building infrastructure around program efficiency, articulating program outcomes and investing in evaluations, and staff retention (i.e benefits, prof. development, etc.) This makes sense to me and I’ve sliced the explanation pie in many ways to get the board to buy-in especially on the heel of significant deficit. For context, unlike many nonprofits, we have a healthy reserves and 3 months operations in our operations. I appreciate the article because it dispels the myth/tendency that all deficits are bad. My question is how do I frame this “growth budget” in a manner that lets them accept the deficit and see this new budget as not way to recover from the deficit, but to learn from it and support the opportunity to grow?
I need help from this group about explaining to our Board Treasurer we don’t have to take money out of savings to zero out our budget at the end of this year.
Any replies at earliest convenience would be awesome!
Perhaps recommend that the board treasurer read this article, as it provides a good summary of the requirements.
While I find most of this article very helpful, the author makes one very common mistake that I believe hinders the work of many non-profit governing boards.
In the for profit world the goal is to earn money which we call income. More income (assuming you earn it wisely, legally, and without incurring disproportionate expenses) means you are accomplishing your goal. In support of your goal, you are willing to spend money which we call expenses. Expenses are a necessary part of reaching your goal, but they are not the goal.
The non-profit world turns this upside down. In the non-profit world the goal is to accomplish some good in the world, to do ministry. You do this by expending money and we call these expenditures. Higher expenditures (assuming the money is spent wisely and well) means you are doing more good. In support of these expenditures you seek sources of money. Typically these are donated in one way or another, so we don’t call it income (which implies it was earned), we call it revenue. Revenue isn’t the goal of the non-profit, it is the necessary step in accomplishing the goal of expending money in support of ministry.
In short: The for-profit world incurs necessary expenses in order to generate a desired income. The non-profit world seeks the available revenue in order to fund expenditures which accomplish a desired ministry. Changing the language from income and expense to revenue and expenditure helps members of governing bodies make the mental shift from their for-profit life to the world of the non-profit.
Father Simpson, you are correct the moneys received in a nonprofit are called revenues rather than income. As well in a nonprofit the financial statements are not called profit and loss and balance sheet but rather Statement of Financial Activites and Statement of Financial Postion respectively. A nonprofit has unresticted, temporary restricted, & and permenantly restricted (usually endowment). These restricted accounts are restictions imposed by the donor.
My Board is questioning the fact that we consistently show a loss on our 990 because of depreciation expense. When a funder reviews our financials we show ( on paper) a loss. There is much debate as to how we should report it. On GuideStar or Charity Navigator a potential donor see losses. We have a significant amount of land and buildings
Any advice?
You might want to review your depreciation rates. Often times, depreciation expense includes old items that are no longer part of fixed assets, for one reason or another, or is calculated based on an arbitrary system by someone who no is no longer there. The fact of the matter is that depreciation expense should reflect the cost utilization of fixed assets over time. If you find that an adjustment needs to be made, your auditors can do this without impacting current year operating results. Keep in mind that if depreciation expense is causing your company to go into a deficit, then in fact, you do not have a true operating surplus. When preparing your budget, make sure you budget to account for depreciation expense. Here’s an easy example to illustrate how a change in your depreciation calculation can help. If you have a roof replaced, for $250,000 and you depreciate it for 10 years, your depreciation expense is $25,000 a year (assuming straight-line, no salvage). However, if you depreciation over 27.5 years, it cuts your depreciation expense by more than half. You will need justification for making this change but it may actually help your organization. Additionally, if it is significant, your Board will likely need to be made aware of this. Guidestar and Charity Navigator are definitely forces to contend with, as they are more and more becoming the first stop for potential donors.
I work for a $16, 000, 000 501 (c)(3) with 23 different youth and family serving programs. These range from residential programs funded primarily with state per diems to community based programs such as child advocacy centers with multiple funding streams. I work with one of the advocacy centers. For the past several years we, the child advocacy center, received funding as follows; reimbursement through the state criminal justice system (Crime Victims Compensation Program) for each forensic interview and each forensic medical exam; Reimbursement for personnel costs through a federal block grant (VOCA) managed by the same agency; An annual award from out state accrediting body (Children’s Advocacy Centers of Georgia); an annual award from our national accrediting body (National Children’s Alliance); An annual award from the local United Way; and a portion of the net precedes from an annual fund raising event for which the advocacy center was “spotlighted” as funds, sponsorships and ticket sales were solicited. We submitted proposals to each of these funding sources with detailed needs, strategies for addressing those needs and budgets detailing how requested funds would be used to meet those needs. Several of these sources do not required documentation regarding the expenditure of funds. We simply get a periodic check or funds transfer.
We have a $30, 000 surplus on June 30th. We have a $0 balance July 1. I am told that this is a benefit of being a part of an “umbrella agency”. We are using funds solicited and /or awarded for very specific services and moving those funds elsewhere to cover unassociated (and at times conflicting) causes. This bothers me as it appears as an ethical if not a legal dilemma.
How do you convince a non profit board that it is not fiscally responsible to continually draw down on reserves? Our NP takes in about $7500 per year yet the board wants to spend $15,000 per year, one third of which is not part of the goals of our organization. It is extremely frustrating to watch our small endowment fund of approx $100,000 get eroded away.
I am the administrator of a small non profit environmental coaliton. We can keep the doors open with about $30K per year. We raise money in about 6 ways, and I am responsible for about half of the $30K. The rest we make from providing fiscal agency for various environmental coalitions and projects. Some of the projects are managed by board members as part of their day jobs at the members of the coalition, I can not predict how much the fiscal agency projects will receive in grants, so I always budget conservatively. As I say to the board, this is what I can safely predict for revenue, ands it is a few thousand dollars less than we need to keep the organization operating. Then I say, i have budgeted with a deficit for the last 5 years, and each year we have manged to have more revenue than anticipated and run a small surplus. The proof is that we have 2 years budget in the bank with no debt.
I know,. it is a very good place to be for our organizaiton and for myself, as I have not worried for years. but I offer it up to show that budgeting is budgeting and it is not the complete reality as well as the point that you can run a surplus and add to reserves so that if we have a bad year, we have lots of time to figureout what to do to recover.
If you consistently spend more money than you raise, you will run out of money and not be able to provide services to anybody. So, you should always budget a profit, so you’ll have a cushion on those rare occasions when you do have to spend more.
The profit/not-for-profit difference is irrelevant. You have to maintain financial viability regardless of your purpose.
Question – Is it ok to run a negative nonprofit if you know that you have payments of pledges coming in to cover the expenses of that fiscal year. Because they are pledge payments, you cannot count it as revenue for that year, but am wondering if it is acceptable by funders and auditors to budget with a deficit, knowing we will have a significant amount of pledge payments.
Question – Is it ok to run a negative nonprofit if you know that you have payments of pledges coming in to cover the expenses of that fiscal year. Because they are pledge payments, you cannot count it as revenue for that year, but am wondering if it is acceptable by funders and auditors to budget with a deficit, knowing we will have a significant amount of pledge payments.