Managing a budget for a nonprofit organization is a tedious annual ritual where organizational goals are created in one silo, number crunching is done in another and staff-level input is generally restricted to a given operational unit. Therefore, it should come as no surprise that the majority of annual budgets go out-of-date well before the intended dates are ever met.
A budget isn’t a prediction, a forecast, a target, or a wish list. A nonprofit budget is a financial document that provides an overview of how the organization plans to spend its money. There are two parts to the budget — expenses and revenue. It’s crucial that the budget be centered around the primary goals and objectives of the organization.
A sound budget is important for financial sustainability and provides a guide for financial health and sustainability. If your organization is not clearly benefiting from your current planning, budgeting, and forecasting activities, there is a better way. Nonprofit leaders who rethink conventional assumptions and embrace next-generation processes and technologies can improve budget planning and performance against strategic objectives.
Benefits to Budgeting Nonprofits
Accountability and transparency are important components that donors and grant-makers consider before providing funding, and good budgeting demonstrates these components. Donors want to know where their money will be going. Good budgets assure donors that the nonprofit is actively overseeing the budget process. Having a good budget aids board directors as well.
Maintaining a proper budget gives boards proper control. The budget clearly illustrates how much cash is coming in and going out. Budgets form the basis for boards to make better decisions and to avoid making mistakes. Boards can use budgeting to limit specific expenses as necessary and work to increase income sources early when it looks like there may be a shortfall. Monitoring the budget also provides an opportunity for board directors to move money around to allocate it efficiently as their cash flow changes.
Most importantly, nonprofit organizations' budgets should be built around their programs and activities to keep them focused on their objectives.
Budgeting for Nonprofits: Tips & Best Practices
Consider utilizing the following six best practices to help each budgeting and planning cycle yield the most value possible:
Leveraging technology. For many years, the backbone of budget planning has been Excel spreadsheets. A new generation of software solutions can provide a unified solution for budgeting, forecasting, and reporting while being more agile and scalable and automating key company processes.
Increasing frequency. Although the annual budget plan has long been a cornerstone of nonprofit planning, this approach is unsuitable for volatile markets or situations where quick course corrections are needed to navigate budget opportunities or constraints. Rolling forecasts, which require operating units to update business projections each month, are a better approach to bringing organizational strategy and operations into alignment. This increased frequency provides a more accurate picture of current conditions and allows for more nimble management of staff time and financial resources.
Utilizing driver-based planning. Researching key external market drivers, such as industry trend reports, peer organization data or pertinent demographic information is the first step in this process. Once the external fact-finding is complete, narrow the findings to those drivers that add direct value to organizational growth, are directly related to improving the accuracy of budget forecasts, and are crucial to meeting financial goals. Consistent use of this process can provide leaders with confidence that budget forecasts are formulated with both external and internal key performance indicators in mind.
Expanding participation and collaboration. Although budgets are often set by executives, the process isn't always collaborative. This is a lost opportunity. Executives should communicate the organization's strategy and identify the contributions or roles expected of each individual business area. Business unit leaders and staff will be in an excellent position to provide the best projections once this strategic alignment has been defined given they have in-depth knowledge of their specific areas and how to best align with organizational strategy. So in an effective budget approval process, executives still decide the organization's strategy, but hands-on unit staff provides the needed forecast data. This, in turn, improves management's ability to implement strategic plans.
Ensuring process management. Effective process management requires buy-in from all core stakeholders, since their active participation can make or break success. Because of this, it's critical to consult with business units before the start of each budget cycle and to routinely include them in the continuous improvement process.
Utilizing real-time reporting with drill-down capabilities. Nonprofit leaders are consistently faced with crucial decisions about running their organization and crave the right data to help guide those decisions. However, far too many forecasting and budgeting processes still rely on Excel pivot tables, which are filled with outdated data and very limited (if any) supplementary data. Even worse, some teams employ data from different systems that may contain conflicting information, leading to additional uncertainty rather than greater clarity. Because of this, nonprofit organizations need to keep improving their procedures and technology in order to provide real-time reporting with drill-down capabilities. A suitably structured chart of accounts, standard processes, and a modern financial system can become the foundation to sound budgeting and forecasting decisions as well as a more effective oversight capability.
FP&A Solutions Assist in Budgeting for Nonprofits
As previously noted, Excel spreadsheets have substantial limitations and challenges that are inherent when it comes to planning and budgeting. Today, a variety of FP&A software providers offer tools that can help organizations convert data into actionable, fact-based information that can enhance organizational decision-making and strategic insight.
While FP&A solutions clearly offer benefits in terms of budgeting, forecasting, and reporting, they also offer extra advantages like the ability to better plan for personnel, capital expenditures, revenue, grants, programs, or other budget centers, as well as the ability to manage consolidations, financial reporting, financial analysis, dashboards and scorecards, and process workflows.