Nonprofit organizations have a unique financial cycle, and budgeting is a critical function of that. In order to budget adequately, it’s important to be strategic. You should never follow the “same as last year” approach. If you run your organization the same way you did last year, you’re likely to keep getting the same results—if you want to improve, you need to do something different.
Strategy-Based Budgeting
For a nonprofit budget to be effective and useful, it should be based on your organization’s strategy and goals. There are several different budgeting scenarios to highlight, as well as best practices for turning your budgets into meaningful and invaluable financial tools.
When using strategy-based budgeting, keep in mind that nonprofit budgets do not have to balance perfectly. Instead of focusing your budgeting process on that common misconception, ask yourself some of the following key questions centered around financial outcomes, stakeholders, goals to serve patrons and actions needed to reach those goals.
Financial Outcomes
What financial outcome does your organization want or need this year? Your bottom line will look different for each of these financial outcome scenarios: debt reduction, investing in infrastructure or technology or, simply, basic survival.
Do you have debt you want to pay down, do you need to invest in infrastructure or specific programs, or do you just need to survive the upcoming year?
If your desired outcome is to pay down debt, part of your financial strategy could be to increase reserves over time, resulting in carrying a larger bottom line over several years, instead of breaking even.
However, if your financial goal is to invest in infrastructure or specific programs, it may be acceptable to have a deficit budget for the upcoming year in order to do that.
And if you just tend to be scraping by financially, your financial outcome may need to be to break-even, so your strategy would simply be to increase revenues and to cut costs (without sacrificing your programs).
Goals to Serve Your Mission
Within your mission, you have identified who you serve. With this information, you can then determine what your goals are to serve them. Some examples of specific, quantifiable goals include:
- Reduce homelessness in a certain area by 5% next year
- Feed 500 hungry children in the next month
- Provide medical supplies to medically fragile children
- Provide special support for a group of veterans
To learn more about strategic budgeting for nonprofit organizations, watch our related webinar recording: Financial Cycle: Budgeting Things NPOs Should Consider..
Actions Needed to Reach Goals
After identifying each goal to support your mission, you can then determine what it will take to achieve them. What actions need to be taken to reach those goals? Be specific when brainstorming these actions. Having a greater understanding for what it will take will help you determine exactly what resources are needed to put your plans into action.
Most likely, much of this is already being done in your nonprofit organization at a very high level or within individual departments or committees. The challenge is to take your action plans and apply them to your budgets in order to be intentional and for the budgets to support your overall strategy.
Allocating Resources
Once the basic questions of your strategic budgeting plan are answered with priorities in mind, it’s time to develop an overall strategy and begin allocating resources. It’s important to allocate resources from the strategy down, not from the bottom line up. Question how much should go to:
- Operations
- Programs
- Investing in new technology/innovation
- Fundraising efforts
You might find that once you dig deeper into figuring out the resources needed to reach your goals, you simply don’t have enough to put all of your goals into action. Or perhaps you have resources, but they don’t really benefit your strategy and desired outcome. This tells you a shift in resources may be needed.
For example, do you have a program or department that is really good at doing a particular task? Shifting some workload to that area could free up capacity to support some of your goals. Or, you may need to possibly eliminate certain costs altogether.
Another option could be to combine programs or activities while still serving each of the separate functions. For example, one nonprofit organization decided to combine one of its programs that brought the families it serves together with certain fundraising activities. This way, certain facilities could be shared at the same time. Then, during the COVID-19 pandemic, this organization ended up suspending some programs and allocating the majority of its resources to one specific program that supported the most in need during this crucial time.
When a nonprofit organization, like this one, already has a strong budgeting process and cash position in place, sacrificing reserves during critical times won’t be an issue. If your budgeting is based on a strategic perspective consistently for years, your nonprofit will remain secure.
Maybe you’ve been doing the same thing year after year just because that’s the way you’ve always done it. But strategically eliminating certain processes that add little to no value or are considered obsolete will increase efficiencies and reduce costs. Ultimately, this will help free up needed funds that can be used to support your strategic objectives.
Formal Changes to a Budget
Keep in mind there are certain things that will constitute a formal budget update (e.g. a new program, or a program elimination). Your nonprofit board should review and approve any major changes presented during a budget update. However, budget variances alone would not require a budget update. Those variances help provide information regarding your organization and changes that are occurring and help develop future budget. Your internal control process should include review of the budget and those variances should be discussed and documented.
The key is to be continuously reviewing your budget and making sure the original assumptions and goals are still true—if not, and your plans for the year have changed significantly, the budget should be updated. Some nonprofits choose to update their budgets mid-year no matter what, which can be helpful. Updating your budget is especially important if your nonprofit organization received any economic relief through the American Rescue Plan (ARP), Paycheck Protection Program (PPP), Employee Retention Credit (ERC) or Shuttered Venue Operators Grants (SVOG).
Remain Mission Focused
A final thing to consider is if existing resources add value to the overall mission or strategy. Once you really dig into your goals and what is needed to achieve them, you may be surprised at what you find within your numbers that you didn’t consider before. When you base your budgeting perspective with the following in mind, you end up budgeting for the value of your organization:
- Strategy
- Mission
- Financial goals
- Patrons or stakeholders
When you assess your strategic budget with this lens, you begin considering whether a particular department, financial statement line item—or even a particular program—actually adds value to what you are trying to achieve.
This does not necessarily indicate how much the total amount will change from last year’s results. Although historical data is important and can play a key role in developing forecasts and budgets, your budget should begin from your overall strategy, and then you should work your way down from there.
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