Budgeting is something that all nonprofits should be thinking about very carefully each and every year. However, in times of economic crisis, it’s even more important for your nonprofit to carefully consider and stick to your organization’s budget.
The national (and global) economic crisis is only enhanced by the panic caused by the spread of unreliable news sources about coronavirus and the financial situation of the nation. With topics as important as these, make sure the first thing your nonprofit does is identify reliable sources of news and information. This will help you stay calm and informed when making important decisions.
From there, you can approach your budget with your head on straight and craft a plan to get through this turbulent time.
If you haven’t created your organization’s budget yet, we highly recommend you take a stab at it. Even if you have created a budget, economic disruptions require a reworking of that plan. Therefore, we’ll start from the beginning.
What is a nonprofit budget?
A nonprofit budget allows your organization to plan and track your financials for a defined period of time. Nonprofits may create budgets for their fiscal year, for their next fundraising campaign, or for their next capital campaign (which can span over several years).
Although many people view separate budgets as disconnected, according to Jitasa’s nonprofit accounting guide, one of the many duties of a nonprofit accountant is making comparisons between your budgeted and actual income and expenses over time. In doing this, your accounting department will help refine your budgets and create more realistic estimates for future budgets.
Many people view budgeting as necessary only to cut spending, but it’s much more than that. Budgeting is designed to prevent an abundance of unnecessary spending. Creating a budget doesn’t mean that your nonprofit needs to cut expenses for the things you need.
Instead of pushing your nonprofit’s financial capabilities and causing unnecessary strain by budgeting too little for your expenses, make sure the line items of your budget are realistic and manageable.
1. Establish effective bookkeeping standards.
As we said earlier, a budget requires your organization to make realistic decisions given past financial data. This means that in order to create an effective budget, you need to start with effective bookkeeping.
Although often lumped into the same category as accounting, nonprofit bookkeeping is a different concept. Bookkeeping involves the keeping of financial records while accounting, on the other hand, encompasses the strategic financial decisions informed from these records.
In order to ensure effective bookkeeping standards, one of the most important things you need to keep in mind is time. If your records are out of date, it slows down the process of budgeting or leads to misinformed decisions.
Save time with effective bookkeeping with the following strategies:
- Keep an organized ledger. Make sure your ledger is coherent for the average nonprofit employee. A disorganized ledger takes longer to input data and for others to understand and base decisions from.
- Record transactions in a timely manner. Bookkeepers record one side of transactions for nonprofits. For instance, payments of rent, utilities, and other transactions should be paid on time and recorded immediately thereafter.
- Allocate costs immediately. Timely allocation of costs is another way to make sure all of your organization’s financial data is well organized for future reference.
Bookkeeping is the foundation of effective accounting and accurate budgeting. When everything is well-organized and up-to-date, your nonprofit will have the tools you need to create an accurate and well-defined budget.
2. Examine your income sources.
One side of your budget encompasses the revenue sources for your organization. This includes your fundraising campaigns, grants, and income from corporate philanthropy. Your revenue will define the amount of funding your organization has to spend on the different aspects of your strategy based on the amount of money you bring in.
Generally, to write this part of your budget, you’ll look at the successes you’ve had with past fundraising campaigns and grant proposals. Your past fundraising can give a good indication as to what your future fundraising will look like.
However, nowadays, it can be more difficult to define the state of your income given the disruptions in the economy. For the last 10 years, we’ve had a strong national economy and haven’t experienced anything quite like this.
Nonprofits who weathered the Great Recession in 2008 may consider looking at how much their income dipped during that time frame to try to predict how it will be impacted now. Meanwhile, newer nonprofits should conduct research to try to make the same predictions.
To keep funding coming in during this time of difficulty, we recommend:
- Grant writing. Reach out to funders who are already doing philanthropic activities during this time like contributing to COVID-19 research or providing services to individuals. These organizations are demonstrating economic strength and the willingness to support philanthropic causes.
- Reaching out to major donors. First, check-in with these supporters to make sure they’re healthy and safe. Make sure to tell these valuable supporters that you understand their economic strain. Then, explain why your cause needs their support more than ever. Show great appreciation for anything they can contribute, even if it’s less than their usual donation.
- Continue fundraising. Change your fundraising strategy slightly to focus even more on impact when you ask for funding. Also, make sure you’re stewarding your supporters according to the times and give alternatives to financial donations (think: in-kind giving, thoughts/prayers, and remote volunteer work). Continuing to try to raise money and keep donors involved will help your nonprofit come out of this economic crisis stronger.
Using these strategies, estimate the amount of money your organization will be able to bring in to best define your income for your budget. Then, you can start analyzing your regular expenses and how they compare to this income.
3. Consider your fixed expenses.
When you’re creating your budget, make sure that the first expenses you incorporate in the plan are those fixed costs, which are the most predictable expenses that your organization needs to plan for.
Fixed expenses are those that are consistent from month to month for your organization. These expenses include payments like:
- Office rent
- Utility bills
- Employee paychecks
- Consistent programs
- Software investments
Nonprofit fixed expenses tend to make up the majority of the operational part of your organization’s budget.
While these costs are very predictable from month to month, they also have incredible risks associated with not paying. For instance, not paying rent can lead to you losing your headquarters, failing to pay utilities could result in fees or having them turned off, and cutting employee pay can lead to a discontented or unmotivated team.
That’s why it’s important to start with these expenses. The higher the risk, the earlier in the budgeting process we should plan for the expense.
4. Consider variable expenses.
After you’ve calculated your fixed expenses, start analyzing the variable expenses. These expenses are not considered unnecessary, but they are called variable because they have the ability to fluctuate over time.
Variable expenses include things like:
- Fundraising expenses. While important for growth, your fundraising expenses can fluctuate depending on your strategy, the types of campaigns you host, etc.
- Marketing costs. Marketing is also important to spread the word about your mission and about your campaigns. This is also variable because you may promote your organization more or less depending on your needs.
- Event expenses. The money it takes to run an event is variable because it is highly dependent on the type of event, the activities included, the venue you choose, and more.
Variable expenses are more difficult to plan for in your nonprofit’s budget. This is because they are built to change. Analyze your variable expenses from your actual costs from last year to try to predict what you’ll need this year.
The risk associated with these expenses tends to be slightly lesser than your fixed expenses because these costs are designed to fluctuate with need. However, it’s not the first place you want to cut expenses in your nonprofit’s budget.
The first place to cut expenses during economic disruption is within the realm of discretionary costs or those that are optional. Perhaps you’ll decide to cut catered lunches, travel expenses, and other optional activities to save during the economic downturn.
5. Analyze budgets from year to year.
Budgeting isn’t just a one-and-done activity. If you’ve never created a budget before, the first one you make might not be incredibly accurate. However, over the years and campaigns, it should become more accurate as you learn to predict your income and expenses with more accuracy.
As we said earlier, your accounting team can help you compare and analyze the differences between your budgeted and actual income and expenses. If you don’t have an accountant on staff, don’t worry. Outsourcing to experts like this one can actually help nonprofits save money while still getting expert help on their budgets from year to year.
Annual budget analysis is important to come up with better predictions of variable expenses or to see if you can afford an additional fixed cost.
Make sure you use technology that will help your nonprofit save your budgets from year to year and campaign to campaign. This way, you can look back at them to learn as time goes on. This year will definitely present a new learning opportunity for many nonprofits. Therefore, keep a close eye on your budget to better evaluate needs in the future.