Approaching Your Nonprofit Operating Budget from a Fresh Angle– October 06, 2016

For many nonprofits, the arrival of fall means one thing: budget time. If you’ve struggled in the past to put together an annual operating budget — or struggled throughout the year to stay on budget — this can be a frustrating time. But it doesn’t have to be. By changing your approach, you can make the budgeting process easier and more efficient.

Try a New Mindset

It’s a new budget, so why not a new mindset? Instead of thinking of your budget as a test you’ll either pass or fail by the end of the year, use it as a planning tool that will help your organization meet both short- and long-term goals. Although you’ll want to refer to the previous budget’s numbers, don’t rely on them exclusively for the new budget. Your nonprofit’s changing priorities and environment, as well as new laws and regulations such as recently revised overtime rules, should take center stage.
 
For example, let’s say you have a new program but it needs adequate financial resources to really work. Even if your nonprofit’s income is rising, you’ll want to allocate less this upcoming year to other programs that don’t directly address current objectives, even if they’ve received a bigger piece of the pie in the past.

Involve the Whole Organization

To keep budget decisions from ruffling feathers internally and enhance group buy-in, make sure managers and even nonmanagerial staff members have input in the budgeting process. Based on your nonprofit’s strategic goals, program managers should individually submit budgets — and be held accountable to them throughout the year.
 
Don’t neglect to ask for employee input on nonprogramming expenses as well. Keeping administrative expenses in check is a never-ending challenge for most nonprofits. To ensure you’re taking a fresh approach, ask employees if they have ideas for less costly or more efficient ways of delivering services.

Be Conservative

Of course, budgeting is both a bottom-up and top-down activity. Eventually, your nonprofit’s executive director will have to weigh various requests and make compromises before submitting a draft to your board’s finance committee.
 
Nonprofit income can be unpredictable. Even if your nonprofit is flush, it’s smart to be conservative — particularly with pledged or promised funds that may not be available when you want them. It’s easier to revise numbers and expand programming later in the year if unexpected revenue comes in after your budget is final than it is to cut a program’s funding midstream if revenue falls short of expectations.

Choose the Right Model for You

One of the reasons nonprofits often find budgeting frustrating is that they assume the goal of every budget is to break even. In fact, your strategic goals may dictate other types of budgets.
 
If your objective is to reduce risk and strengthen your organization’s overall financial health, you may decide to pay down debt or increase operating reserves. A surplus budget with lower expenses and higher revenue can help you end the year with the extra funds you need.
 
A deficit budget is another possible option — one that isn’t always negative. Most organizations that plan a deficit budget are experiencing revenue shortfalls and can’t meet current operational demands without going into the red. But some nonprofits choose this type of budget to make one-time capital purchases or improvements or to invest in certain functions, such as development.
 
Making a budget that accounts for everything your nonprofit hopes to achieve in its next fiscal year will always take some work, but it shouldn’t be impossible.
 

Reach out to your service team for guidance if you can’t seem to make the numbers “work.” Or contact Marie Brilmyer mbrilmyer@cohencpa.com or a member of your service team for further discussion.



Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.