Budgeting 101 for Nonprofit Organizations

Here's a few tips and tricks when it comes to NFP budgeting. 

Transcript

SPEAKER_00 0:03

Welcome to Navigating Nonprofits with Lifeboat Accounting. My name is Amity, and I'll be your captain today as we discuss hot topics around accounting for nonprofits. Lifeboat Accounting is an accounting firm that works exclusively with helping nonprofits stay afloat. We cover everything from accounting to tech stacks, to strategic planning, 990s, grants, board development, and staff training. When I speak at conferences or board meetings, folks have always suggested to me that I needed my own podcast to tell all my stories and share my experience. So I'm excited to dive right in and to get to some of my favorite topics and share some special guests with you. Welcome to Navigating Nonprofits with Lifeboat Accounting. My name is Amity, and I'll be your captain today as we discuss hot topics around accounting for nonprofits. Today's topic is budgeting. And this topic is one of my personal favorite things to talk about. Um, mainly because it can be approached in so many different ways, and it's almost a personality test on how each organization decides to assemble their budget. I also see a lot of things where budgets go wrong or they may go off, and so I probably can share a few horror stories of things to avoid as well. But I really do want to keep it positive and keep it light in the sense that a good budget will help engage all of the parties within the organization to stay on task with the mission and avoid mission creep, avoid overspending, especially in the environment that we have right now. Um I think in 2025 I re-budgeted some organizations at least four or five times because of the funding changes and challenges that have occurred this year. Um so where do I see budgeting go wrong? The number one thing that I see often that also leads to staff um apathy is that the staff are not included in creating the budget. And sometimes it's just the finance director or the finance person or the board treasurer taking last year's budget and adding 5% and moving on. Um that's okay in certain situations, but if you have staff members who are managing the programs, you'd be surprised. They really do want to be involved in the in the budgeting process, they really want to own it, and they want to be part of the participation piece. So always, if you can, include your staff in your budget process and get their feedback and input so that they feel like they also have a voice too. Um with that being said, a lot of the times what's missing is a template. And I'll go into that in a little bit. I'll do a little bit more of a budgeting deep dive. Um, something else that I see very, very often as uh an issue that organizations face is that first year of multi-year grants or a multi-year donation. Because the accounting rules and regulations have different timing recognition on revenue when it's a multi-year grant or donation. And so what will happen is that the staff will budget and be like, oh yeah, I'm supposed to get that $50,000 in this year, and they'll put it in as revenue again in the next year, um, not recognizing that there's accrual basis accounting rules and recognition revenue recognition rules that they're not aware of. And then all of a sudden they'll get to that, they'll use the money, and then all of a sudden all the general operating funds that the organization has saved up are gone, and they're knocking on my door saying, Hey, we have a budget deficit and we can't figure out why. And I'll always go to the budget first and say, Okay, did the budget happen on cash basis, but the books are kept on accrual basis? And probably 75% of the time that's what happened. And it's simply just an education that is needed internally for the staff or someone's eyes on the fact that there's a timing difference of revenue. By that I mean say someone donates $100,000 for a specific purpose, but it's gonna come over two years, and they're gonna get $50,000 in the first year and $50,000 in the second year. In most situations, you recognize the entire gift in the year that it was given and you book a receivable. You can't go back in the second year and recognize that revenue again. And that's probably the largest budgeting issue that I see happen that causes cash flow issues for the future. The other thing that I see is not tying the budget to the strategic plan. And sometimes, I'll pick on the strategic planners, um, that they sit with the board and all the stakeholders for the organization and they come with a strategic plan that is more the future looking. If we had all the money in the world, this is what the organization could do, kind of viewpoint, rather than what do we have for resources now, and how can we spend those in the wisest possible ways. Um, an example is I had an organization that literally had less than 30 days of cash left. They paid, I think it was like $30,000 for a strategic plan, and it included a new facility and all of this additional programming and staff and FTEs. Um, but this organization didn't even have a development director. And I figured out, just working backwards from the strategic plan to their financial picture now, and you know, the average number of gifts that they received every year, that it would take the organization $14 million in 10 years to get to that strategic plan that was supposed to be, you know, a three to five year plan. So in that situation, there's no budget that could possibly be created that was realistic that would get them to that point in you know a short time. So I always say look at your strategic plan and then break it down into tiny pieces if this hasn't happened yet, or instead adopt a strategic compass, which is a more short-term strategic planning process. And with that, look at what the future expenses need to be in order to implement everything in the strategic plan, and then work out a plan with the budgeting that maybe you can't do it all in the first year, but you can do some of it and build it out that way. The other thing that I see often is when folks go to do their budget, and it's not necessarily the wrong way to do it, it's just it's sometimes creates unrealistic expectations for the development teams, is that the organization throws everything into the bucket, everything that they want in the budget, all goes in, and they plug the deficit to, oh, we'll just fundraise more without an actual fundraising plan. And that, especially in the past few years, has not turned out well for many organizations, you know, um, with the current economic conditions and political environment. Uh a lot of folks have seen individual donations go down. Grant funding is more time consuming to achieve. And so I think plugging the difference to fundraising is something of the past. Or if you are going to plug it to fundraising, have a strategic fundraising plan so that you know how you're going to fill that gap. So, one of the other questions I get is how do we start the budgeting process? How long should it take, and what types of items that we should gather? And I always say, look at last year's numbers first. You know, you can take the last 12 months or a 12-month rolling average if you're not at the end of your fiscal year, compare it to your budget last year and see where you were off. The budget is supposed to be a guideline, not the hard rule. So it's not uncommon to be off budget, and as long as it's explainable, it's totally fine. Um, if you're extremely off budget in the negative, might be something more to be concerned about. But if you all of a sudden your staff salaries are up, but your revenue is also up, it's because you may have gotten additional funding to run a program. Um, I usually start with looking at last year's numbers to budget and comparing and seeing where we went off or if anything was reasonable. And then I'll usually have a team meeting and I'll pull everyone in the room and I'll make sure that they've had the financial literacy training that they need to be able to be successful in this space. And I will also ask them to fill out information on their programming, if anything's going to change, you know, if they're running different events this year, um, are there gonna be cost differences, and really start to get them into the strategic mindset and make sure that everyone's read the strategic plans, read the mission and the vision and the values of the organization, and take a deeper dive into budgeting rather than just saying, okay, office supplies insurance probably gonna go up 10%, so we'll just do that, and say, what do we really need? What is something that's also in the budget that we want to have that we don't have that we may have that we could ask funders for? Um part of this budgeting process is also bringing to light the things that you don't have yet. And a lot of the development teams, it's so much easier to fundraise for items that are specific and tangible with donors than it is to ask for general operating support. Obviously, you don't want to do all of your asks for restricted gifts and things like that, but um this is a great time to kind of gather that menu of options for potential donors and provide that to the development team to see what is reasonable, or maybe they know someone off the top of their head that would love to fund that specific item. Because also part of the budgeting is also bringing in the staff, the board, and everyone to kind of come together and say, what can we really do? And as part of that process, I usually give everyone an Excel spreadsheet with the chart of accounts, with definitions and terminology and funding sources all set up and ready to go for them. And then they can fill in what they actually need for expenses and kind of walk them through the process. Then I'll gather all of those spreadsheets from all the program staff, from the development team, from the management team, and I'll accumulate those and I'll enter them into a budget. From there, I'll look at it and say, is this reasonable? Usually the first, you know, first or second draft. It's always, you know, there's more expenses than funding for most nonprofits, and that's pretty normal. But then we can kind of take a realistic approach and step back and say, what can we really do this year? Is there a way to fill those gaps? Um, and talk to the development teams and the funders to see what can what is possible. Um I feel like that's a more organic approach than just taking insurance is gonna go up this much. Um, how long it should take and when should you start? Depends on the organization, truly. Um, there are some organizations I send them the information and the templates, you know, like a month in advance, and we'll sit down in a four hours or eight hours and we'll just crank it out. And others, they just need more time because they have larger programming staff and they just need time to think and go back and obtain feedback. I would say most people start between three to four months before year end. Some start as early as six months before. Um, you know, as part of the the board due diligence, most nonprofits are required to adopt a budget to operate in the the future year. So how long it takes and the timing is truly up to the board and the organization. I do say it's harder to do things, especially if you're like a calendar year end, to try to get people together in end of November, beginning of December. So we usually start with most of our clients if you're December year end, usually you know, August, September, and then have like a first draft in October. People can mold it around for a month and then it's approved in November or December. I think also providing education and training is really important. Whether you have a standard recorded video that you can share with everyone before the beginning of each budget process, or if you just have a sit-down training um to gather everyone out. Not to gather everyone out to I think it's good to get everyone together as a group, whether you call it training or strict strategy or planning session, so that everyone's kind of on the same page and same same wavelength. Um, and sometimes you identify opportunities that you didn't even know existed. Like, for example, I was sitting at an organization and I was talking to the intern who was hired just to do the social media, and I was talking to her about um how the organization had some big plans for next year, maybe you can do some development posts and um help get the word out on a couple of different uh strategies. And she's like, Oh, that's so cool, that's really great. You know, my dad works at Microsoft. And I was like, wait, wait, hold on. Your dad works at Microsoft, and most people know that Microsoft is one of the one of the best um organizations that matches donations. And I was like, Well, do you think we could have a conversation with your father about getting the organization on the match program? Um, and she said, Absolutely, yeah, and we found it, we got it matched, and now they have a $13,000 donation every single month, which is quite phenomenal and very helpful to the organization. So not only is it just you know talking about budget, but talking about opportunities and getting everyone on the same page and energized. The other thing is when the staff feel engaged and like part of the process, they feel like they're part of the mission rather than just being, you know, told how to here's a budget, just follow it. Or they may not get any information at all until it's too late. You know, if they're getting the information once a quarter, it's really hard to make decisions. So just getting everyone on page on rules and expectations, and um it's it's a collaborative event. I find that budgets that are created collaboratively are more successful than the ones that are just created by the finance director.