Nonprofit Budget TipsJan 25, 2024
Happy New Year!
Whether you're starting out a new fiscal year now, or preparing for a new fiscal year that begins in June, I want to share the most important steps you can take once you've set your budget and you're ready for your new fiscal year!
First, let's begin by reviewing what a budget really is and what it is not. Your budget is not just some tedious task to be checked off your annual to-do list. It's actually a plan that's meant to remove some pain by giving you clear stewardship of your resources. It's part of your business plan as a nonprofit. Your budget outlines not just where the money will come from, but also how volatile those sources are. It shows you what to watch out for and when to pivot. Most importantly, it tells each of those dollars where they will go.
Your budget aligns your spending plans with your program priorities. We should never be creating budgets absent from the vision and direction of our programs. Your budget should bring those two things together and set some boundaries on the decisions you'll make throughout the year. One such decision is staffing. Knowing your salary budget and your actual salary spending will help you determine whether or not you can make those personnel decisions that are sitting on your desk today.
How NOT to Use Your Nonprofit’s Budget
Let’s be honest- for many nonprofit Executive Directors and boards, we set a budget and then we just put it on the shelf, or enter it into the software and forget about it. Then, a few months down the road we think, “Oh, we should look at our budget and see how we're doing!” But, (and I can’t overstate this point) the budget is really one of the most valuable tools that you have. So, I want to equip you with the these tips to use it effectively.
Allocate Your Budget Out
Chances are, your income and expenses are not earned evenly over the year. Chances are that one month is not like the next or the one six months from now. One example I've seen is a nonprofit who has an annual fundraising event. Their income is concentrated in the month they have their event or maybe also the month prior to the event. Let’s say that you have an outreach event for one of your programs, and it happens in a specific month of the year. Well, the costs that are budgeted for that major outreach don't need to be distributed one-twelfth to every month of the year. Instead, they should be budgeted for in the period of time in which the event happens. If you're not sure how to distribute something, just choose the annual distribution or the one-twelfth or 8.3% allocation. I'm sure that your budget software allows you to allocate your budget, even if you’re using Quickbooks. So go into your software, enter the allocations, and really spend some time thinking about them.
Use Your Budget as a Cash Flow Tool
Guess what? Once you’ve entered your allocations, you’ve turned your budget into a cash flow planning tool. Now it’s time to use it! This means run the report that shows the budget that's been distributed across the calendar year. At the end of each month, look for either a positive number or a negative number. Positive numbers indicate more income comes in than expenses go out. At other times of the year, you might find the exact opposite. I know a nonprofit who does their largest fundraiser in the fall and throughout the year they actually can run at a deficit. But when that major fundraiser comes, they raise enough funding to keep them going for at least another whole year.
I want to remind you that the information you're inputing into your software also becomes a great tool to export out of your software. So how do you use it? Well, you're going to use this information to set expectations of what your monthly financial results should be, and then evaluate your actual results compared to what you expected. So let's say it's January and you're expecting January to be a month with a deficit of $20,000. This means you expect to spend $20,000 more than you bring in. At the end of January, when you're running your financial reports, look at your actual numbers and see, did we come close to that? Or was there a larger than planned deficit? This gives you a reference point to see if there's some changes to be made or there's some income declines that you need to pivot and respond to.
Use Your Monthly Allocations as an Investment Planning Tool For Excess Cash
Yes, I'm saying excess cash because I hope that's what you have. If you happen to be in a place where you're not operating with much cash and needing to borrow, the tool works in that case too, but I hope you don't find yourself there for very long. We want to move forward so we can sustain our mission. But, for now, let’s say you do have the excess cash. Well, if you know which months of the year are your leanest, then you can take advantage of some really great opportunities in this current market for CDs. CDs (Certificates of Deposit) require you to commit to a period of time. So maybe you need to commit to having those funds put away for three months or six months, and you can tell from your cash flow budget allocation that you’ll be fine because you don't start needing those funds until the fall. So, if you’ve got three to six months, you could stagger those CDs out and still have your cash when you need it. So the budget becomes not only a cash flow planning tool, but also an investment planning tool that can increase your earnings potential and help your nonprofit make some money off of the money you're just holding until the time you're going to need it.
Your budget is a roadmap and a guide to your financial success. I hope this inspired you to move into a process that makes your budget and your financial reports more of a practical decision-making tool that helps you to take action for your mission. If you found this helpful, then I invite you to subscribe to make sure you get these weekly tips delivered straight to your inbox.
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