How Your Nonprofit Can Break Bad Budget Habits
Autumn is here and many not-for-profits are starting to think about their 2023 budgets. If your budget process is on autopilot, you might want to pause and think about changing things up this year — particularly if you’ve experienced recent shortfalls or found your budget to be less resilient than is ideal. Here’s how to rethink budgeting.
A holistic approach
Your nonprofit may not always approach its budget efficiently and productively. For example, budgeting may be done in silos, with little or no consultation among departments. Goals are set by executives, individual departments come up with their own budgets, and accounting or finance is charged with crunching the numbers.
You’d be better off approaching the process holistically. This requires collaboration and communication. Rather than forecasting on their own, accounting and finance should gather information from all departments.
Another habit to break? Underbudgeting. You can improve accuracy with techniques such as forecasting. This process projects financial performance based on:
- Historical data (for example, giving patterns),
- Economic and other trends, and
- Assumptions about circumstances expected to affect you during the budget period (for example, a major capital campaign).
Forecasting generally takes a longer-term view than budgeting — say, five years versus the typical one-year budget. It also provides valuable information to guide budget allocations and strategic planning.
You also might want to do some budget modeling where you game out different scenarios. Consider your options if, for example, you lost a major grant or were (again) unable to hold big, in-person fundraising events.
If the COVID-19 pandemic has proven anything for nonprofits, it’s the necessity of rainy-day funds. If you don’t already have a reserve fund, establish one. If you do have a reserve fund, avoid the temptation to skip a budget period or two of funding for it.
Another idea is to switch from your annual budget to a more flexible rolling budget. You would still budget for four quarters but set certain intervals during which you’d adjust the numbers as circumstances dictate. Typically favored by organizations that experience volatile financial and service environments, rolling budgets can empower nonprofits to respond better to both crises and opportunities in a timely manner.
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