How you approach planning your nonprofit’s budget has a lot to do with your size and history. Medium-sized and above nonprofits usually have a well established process in place and a long track record over years of financial ups and downs to help predict their needs.
An early start to budget planning is advantageous, providing more time to get donor and board input, think through different options and get ready for grant opportunities that require a projected budget for the following year.
Younger nonprofits may find it more difficult to pick the starting point for budget planning and often wait too late in the year to begin that process. To get started, think of budget development as mission-driven or money-driven. While a simplification, using these concepts can help to get a handle on both program and funding strategies for next year.
More mature nonprofits can look at their current budget, add a percentage increase across the board for inflation and then see how their existing programs can fit into that amount and if new programs will be possible to add through new fundraising campaigns.
This is essentially money-driven planning, with no criticism of that approach implied.
As its name suggests, in mission-driven planning you look at the programs (events, services, etc.) that are driven by your mission and create a program plan for the year.
Add in other estimated general operating costs (office, phone, staff, etc.). Then determine how much will be needed to fund those costs and let that guide your earned and contributed income goals and strategies.
In the contributed income arena, making sure you set achievable objectives for the people working or volunteering with your nonprofit will temper your goals to keep them realistic and to make program and overhead adjustments if needed.
Has your board discussed what your nonprofit business model is? Whether your nonprofit is staffed or volunteer led, your board’s understanding of this is critical to building and ensuring your nonprofit’s financial sustainability.
Developing a business model statement forces a crisping up of your income and fundraising strategies.
To help your board with this process, use some of the readily available tools for business-model planning. Don’t let the term “business model” keep you away from this step.
A simple business-model statement offered by nonprofit resources website Blue Avocado is: “We produce plays and conduct youth workshops, sustained through a mixture of ticket sales, foundation grants, workshop fees and an annual benefit.”
Another piece of weaving organizational sustainability into your budget planning is your nonprofit’s approach to building operating reserves.
Mature organizations can increase public confidence in their sustainability with a growing endowment fund. Younger nonprofits must also decide how to build reserves, since their organizational credibility and hence fundraising capability will be enhanced by a decent cash operating reserve.
For the smaller nonprofit, decent would be defined as at least three months worth of reserves, depending on how consistently your expenses and income flow through the organization. The board should set an operating reserves policy as part of its financial oversight role.
It’s easy to see why starting several months ahead of the new year is needed for adequate budget research and feedback. Starting in June is ideal. By then you will have a good amount of current-year data to work with for planning, and you’ll gain the advantage of having next year’s budget in hand before those revenue needs are upon you.
If your nonprofit has not taken up the discussion of 2014 budgeting, doing so as soon as possible will be critical to your success next year.
Sarah Todd is founder and principal of Change Pioneers, an information resource on effective broad-scale change for social good. She can be reached at 912-224-2120 or changepioneers@gmail.com.