Building a better nonprofit budget

Does your nonprofit start its budget process from scratch each year or do you mostly make simple adjustments to the previous year’s budget? Either way, if your organization operates on a calendar-year basis, it’s probably time to start thinking about this annual chore. Issues such as reduced grant funding and increased service needs can take time to resolve. You may also want to address possible stumbling blocks you’ve encountered in previous years.

Banish silos

Your nonprofit may not always approach its budget in an efficient and productive manner. For example, does your organization build its budget in silos, with little or no consultation among departments? Perhaps executives set goals, individual departments develop their own budgets and accounting or finance is charged with crunching the numbers.

You might be better off approaching the budget process holistically. This requires collaboration and communication between units. Rather than forecasting revenues and expenses on their own, your accounting or finance team should gather information from all departments first, then perform their financial calculations.

Improve accuracy

Also be wary of underbudgeting. You can improve accuracy with techniques such as forecasting, which means projecting financial performance based on such variables as historical data (for example, giving patterns), economic trends, and assumptions about circumstances expected to affect your organization during the budget period (such as a major capital campaign). Forecasting generally takes a longer-term view than budgeting — say, three years versus the typical one-year budget. It also provides valuable information to guide budget allocations and strategic planning.

You might also want to perform some budget modeling, where you game out different scenarios. Consider your options if, for example, you lost the support of a major donor or weren’t able to hold a big, in-person fundraising event.

Or switch from your annual budget to a more flexible rolling budget. You’d still budget for four quarters but set certain intervals during which you’d adjust the numbers as circumstances dictate.

Provide backup

Don’t forget to back up your budget with a reserve fund. If you already have operational reserves, avoid the temptation to skip contributions to this fund during any budget period. For more help building a better budget, contact us.

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