Most nonprofits have a typical annual cycle. It goes something like this: Three months before the end of the fiscal year, the management staff pulls together a budget for the next year. They look at what funds they know will come in, how much they think they can raise, and then create a new budget for the board to review and approve. Sound familiar? At Sharity, we know this process isn’t always easy, but we’re here to help. We have identified seven key components to better organizational budgeting that will help you set your nonprofit up for long-term financial success.
Long-range financial plans are key
It is not enough to just create a yearly budget. To set your organization up for long-term success, you need a long-range financial plan. This plan should align with your business plan and should include income and expense projections based on needs, both current, as well as future, for the next three to four years. It should be developed in partnership with the board and the staff, and it should include essential needs, as well as aspirational goals. Having a strong business plan that highlights long-term goals to which you can attach concrete numbers allows you to sell those specific goal items during meetings with donors. This increases your chances of getting these line items actually funded.
In building a long-range financial plan first, start with your current fixed expenses and income. In looking to future years, Sharity recommends starting with organizational charts that outline the staff needed to carry out the plans your organization is proposing. Next, add costs to each staff member, making sure to include any supplies or expenses they will need to be successful. It’s always a good exercise to check your wage numbers against current market rates to ensure you are budgeting enough money to replace a critical position if that person leaves.
Too often, nonprofits will start to build a realistic budget then get frightened by the large number. This can cause them to underestimate the real cost of doing business, resulting in the organization not having the funds needed to carry out the plan as designed or even worse having too little administrative support. Donors will look at your budget and quickly assess whether or not it is realistic. Remember, a plan is only valuable if it can be funded, and it won’t get funded if you can’t articulate how much it will cost.
Understand organization cash flow
Because many grant sources reimburse for expenses, organizations need to have a good handle on when the money is coming in and when it is being spent. It is an essential piece of building an organizational budget. Understanding cash flow makes program planning and event planning significantly easier. It also allows you to see where and when you will likely have gaps that you need to fill or surplus that can be reallocated to other times or projects. Often, funding is specified for certain needs only, like salaries or programming. So it is key to make sure you properly allocate any cash flow that comes with stipulations.
Additionally, if you’re a new organization that is having trouble figuring out what your yearly expenses actually look like and when money needs to go out, break it down into smaller pieces. What are your quarterly expenses? What are your monthly costs? Once you figure that out, you can build out your yearly expenses and better understand your cash flow.
Budgets can not be static documents
Your budget and agency cash flow documents must be adjusted periodically. Periodically can mean monthly, quarterly, or halfway through the year—whatever works best for your nonprofit organization. But having a living budget is extremely important for financial success. There is no reason to be married to the exact budget you made six months ago just because it was “done” then. When you allow for adjustments in your budget, it becomes a helpful organizational tool year-round, not just something you do once a year to check a box.
Create a diversified income portfolio
By creating a diversified income portfolio, you safeguard your organization from disaster, because the solvency of your organization does not rest on one or two potentially variable funding sources. A diverse portfolio of nonprofit income streams should include things like program fees, grants, any corporate, federal, state, or city contributions, and other forms of revenue, like individual contributions, special events, sale items, etc. It is also important to note that grants should never be the be-all and end-all of your organization’s funding. They can be an integral piece, but an entirely grant-based funding model is not a sustainable way to build a long-term plan for any organization.
Manage your grants
Grant management can make or break any organization. Often grants can only be used for specific budget items, and if you don’t allocate grant funding properly, you do not get to keep the surplus or allocate it to other things. Also known as “use it or lose it,” leaving too much money on the table can easily be the death of any organization. As such, the specific nature of many grants is why it is crucial that you have a comprehensive grant management tool.
The key is to have a tool that both allows you to track your expenses and track the grant funding you have coming in so that you can allocate it all within one place. Our Sharity management tool can help you do exactly that. Not only does it help you properly use grant funding in real-time, but also it helps you figure out where there are gaps in certain expense areas so that you can confidently apply to additional grants with specific line items and time frames.
Good grant management is also important for reporting. Nearly every grantmaker requires reports so they can ensure you are properly spending their resources. If you are using a comprehensive grant management tool, where you track how you are leveraging and allocating all grant funding, reporting becomes exponentially easier. It also helps you plan for the future. By understanding how you allocated grants this time and where your gaps were, you can figure out what types of grants you should be applying to going forward.
Know the nature of your expenses
It is very helpful to understand what percentage each expense or line item makes up of your overall budget. How much of your budget is going to salaries? Rent? Utilities? Programming? This will help you understand the nature of how your budget is actually being used, whether you have a full picture of how much it really costs to provide a service, and what you might be leaving out at first glance. It is also useful for funding meetings, grant writing, and proper grant allocation, because this breakdown, along with the justification for it, is something that people will often ask for when making funding and support decisions. It will also help you allocate your grants properly and figure out what additional grants you should be seeking out.
Get an outside perspective
Sometimes you just need another set of eyes. When you are in the weeds of your organization spending countless hours working on budgeting, it can be hard to see the bigger picture and assess whether you are making reasonable decisions across the board. That is why an extra set of eyes can be so valuable. It can be super helpful to have a trusted outside advisor take a look at your annual budgets and offer feedback and/or point out things you might be missing from the inside. Many of the Sharity experts say this is one of the best budgeting tricks they ever learned.