The pandemic has wreaked havoc with many nonprofits’ budgets over the past two years. Some organizations have taken a more permissive approach to budgeting, but they can’t afford to continue it indefinitely. If your nonprofit is in this position, it’s time to buckle down. Here are three tips to help you develop the realistic budgets you need to return to financial stability.
1. Use all the tools in your quiver
Take advantage of the various tools that can improve your budget accuracy, such as forecasting. Forecasting often is confused with budgeting, but they’re distinct exercises. Budgeting essentially quantifies your organization’s “business plan,” showing revenue and expense expectations for the particular period. Forecasting, on the other hand, projects financial performance based on:
- Historical data (for example, giving patterns),
- Economic and other trends, and
- Assumptions about circumstances expected to affect you during the budget period (for example, a major capital campaign).
While forecasting generally takes a longer-term view than budgeting — say, five years versus the typical one-year budget — it provides valuable information to guide budget allocations and strategic planning.
In light of remaining uncertainties, you also might want to do some budget modeling where you game out different scenarios. Consider your options if, for example, you lost a major grant or once again were unable to hold a big in-person fundraising event. Would you reduce staff, delay or cancel a capital project, or apply for a loan or line of credit?
2. Break your bad habits
Your nonprofit may not always approach its budget efficiently and productively. For example, budgeting may be done in separate silos, with little or no consultation among different departments. At the same time, goals are set by executives, individual departments come up with their own budgets, and accounting or finance is charged with crunching the numbers.
You’d be better off approaching the process holistically. This requires collaboration and communication. Rather than forecasting on their own, accounting and finance should gather information from the departments.
Another habit to break? Underbudgeting for reserves. If COVID-19 has proven anything for nonprofits, it’s the necessity of rainy-day funds. If you don’t already have a reserve fund, establish one, and, if you do, avoid the temptation to skip a budget period or two of funding for it.
3. Roll with it
Nonprofits have long created annual budgets, but you’d be wise to consider switching to the more flexible rolling budgets — at least temporarily. Instead of drafting a budget and setting it in stone for an entire year, you can set certain intervals during which you’ll adjust the numbers as circumstances dictate. So, you would still budget for the following four quarters. But, as the end of each quarter nears, you’d update the budgets for the next three quarters and a new fourth quarter.
The rolling approach largely has been favored by nonprofits that have volatile financial and service environments. It empowers them to respond to developments on the ground, both crises and opportunities, in a timely manner. It also provides a more accurate picture of their current financial conditions and focuses on the horizon instead of the past.
Better budgeting going forward
Drafting and approving an organizational budget is a central tenet of good governance, but it doesn’t have to be a dreaded chore. Adopting these three ideas, as well as documenting and referring back to the data, trends and assumptions that support each budget, can make for a better process in the future.