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Effective Budgeting for Nonprofits

Effective Budgeting for Nonprofits

A common mistake made by both businesses and nonprofits alike is the failure to budget income and expenses.  Far too often, it’s a see-what-comes-in mentality that rules the day, with no attempt to plan, manage, or adapt to changing financial circumstances.  That is also a recipe for fiscal disaster.  There is a better way!

Introduction

Budgeting is vital to a nonprofit’s success.  But it’s not enough just to throw some numbers in an Excel spreadsheet and call it done, never to be looked at again.  Unfortunately, that’s what passes for a budget for even those organizations that bother to go through the exercise.

Effective budgeting creates an expectation and plan from which to fiscally manage your nonprofit.  In this article, we’re going to take a look at budgeting from two perspectives:  1) the startup nonprofit, and 2) ongoing operations.

Budgeting for the Startup Nonprofit

Budgeting for a startup is usually going to be done in conjunction with the IRS application for 501(c)(3) status, the Form 1023.  Form 1023 requires a 3-year future budget projection, a 5-year look-back financial reporting (for those organizations already in operation), or a combination of the two.

The requirements of Form 1023, however, should not be the dictating factor in preparing a multi-year budget projection.  The smallest of organizations, those who are filing Form 1023-EZ because of their expected total income being below $50,000 per year, don’t have such a requirement on their application.  The act of preparing such a budget is critical, regardless of any paperwork necessity.  It is impossible to truly plan how your new nonprofit is going to operate if you don’t know how much money it’s going to take to run it.

An excuse we often hear is, “We don’t know how much money we’re going to be able to raise!  Therefore, we can’t prepare a budget.”  The reality is nonprofits that start this way rarely have a significant impact.  Why?  Because they’re really saying that they are going to make it up as they go, spending whatever comes in on the most pressing need of the moment.

Sadly, this hand-to-mouth existence is the fate of the majority of nonprofit startups.  More than 75% of nonprofits with IRS-approved 501(c)(3) status will never exceed $50,000 in annual revenue.  Many think this is because the founders intentionally keep their organization small and focused on a very small area of concern and circle of influence.  As someone who has advised nonprofits for nearly 30 years, I’m not buying that.  Nobody dreams of starting an organization that has negligible impact.  Yes, some stay very small by design.  But I contend that most stay small because they don’t plan.

Nonprofit startups need to flip the paradigm when it comes to budgeting for the first years of operation.  Instead of focusing on income first (or the lack thereof), focus instead on how much it will cost to do what you really want to do.  Be realistic, though…not pie-in-the-sky.  You have a vision for what you want to accomplish.  What will it take to make it happen?

  • Will you have to hire anyone?  How much will you have to pay them?  What about payroll taxes and benefits?
  • Will you need to secure a facility?  Will you rent or buy?
  • Will you need to buy supplies, equipment, etc.?  Is this a one-time purchase or ongoing?
  • How about promotional efforts?  People cannot financially support what they don’t know about.
  • How much will it cost to keep up with administrative issues and accounting/legal needs?

Those who bother to go through this exercise realize pretty quickly that it costs money to make things happen.  But the advantage of projecting expenses first is to let you know how big of a fundraising lift is in front of you.  It also gives your potential supporters visibility into the true size of the need you’re raising money to address.  Some people are intimidated by this approach.  They would never admit it, but they don’t really want to do the expense side first because they would be discouraged by the impossible goal of raising that much money.

Don’t fall for this!  It’s truly backward thinking.  Plans by their very nature include knowing the cost.  Even Jesus rhetorically challenged his listeners in Luke 14:28 when He said, “For which of you, desiring to build a tower, does not first sit down and count the cost, whether he has enough to complete it?”  Count the cost, then figure out the best ways to raise the money needed to meet the goal.  There’s no shortage of fundraising expertise to help, including our great friends at Get Fully Funded!

Budgeting for the Operating Nonprofit

Budgeting for the already-existing and operating nonprofit serves many of the same purposes as we looked at above, but is a bit different.

Let’s say you have a year or two under your belt.  You now have the experience to go along with your expectations.  What did you get right?  What did you get wrong?  Did you shoot too high or too low?  Maybe you realize expenses are considerably more than you anticipated (that’s the norm, by the way!).  That’s OK…raise your fundraising target.  Yes, you can do that.  Most important in the early years is the reality-check that actual history brings.  You can adjust certain categories up or down, depending upon what you’ve learned.

For those nonprofits that are a few years down the road, your situation has evolved.  You (should) understand how much it takes to operate.  Budgeting for the future is now more of an exercise in educated preparation, whether that’s for maintaining a similar posture or for significant growth.  It doesn’t really matter which it is.  You never outgrow your need to budget for your organization.

Conclusion - And a Side Note

Effective budgeting is often the key difference-maker between those organizations that reach their goals and the ones that don’t.  Failure to budget is a failure to plan…and a failure to plan is a plan to fail!

Side Note:  So often, the audience for our articles is a founder or Executive Director.  When it comes to budgeting, never forget that this is part of the board of directors’ primary fiduciary duties.  It doesn’t simply fall on the go-to person.  It is a whole-of-organization exercise in good governance.

Don’t fear budgeting.  Fear failure more!  Getting your numbers right is absolutely key to your nonprofit making the impact you so desire to see.

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Greg McRay, EA

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

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