A non-profit organization’s (NPO) ultimate objective is to work for a cause. They do not intend to earn revenue and profit from their operations. If you exclude profit and revenue, they operate like a business, engaging in fundraising, reporting fund usage, managing donation risk through reserve building, and budgeting.
No organization, not even a non-profit, can run without funds. Since there is no profit, budgeting challenges for a nonprofit and the way to tackle them differ from those of a for-profit business.
Budgeting Challenges of Non-Profit Organizations
Fluctuating Donations: Nonprofits rely on donations for cash inflows. Since donors are not obligated to donate, donations may decrease in a weak economy when donors struggle to make ends meet. Many other reasons could repel donors, such as a change in the organization’s management or the organization’s failure to comply with specific rules. Most nonprofits cease to exist as their cash donations dry up.
Donor’s Restrictions: The donor can choose how their funds are used, thereby restricting their usage by NPOs. In such a scenario, the nonprofit could face a budget shortage despite having funds, as it cannot use the restricted funds for other things. It has to give donors a detailed accounting of how their money is being used.
Misaligned Spending: An NPO may spend more and still feel the program is underfunded. It cannot justify the spending. This can happen due to a lack of transparency around expenses, launching new programs without considering funding, a change of staff mid-cycle, and incomplete forecasts. Such misaligned spending could waste funding, disrupt the budgeting, and reduce donors’ trust.
Spending Too Little: While spending too much is a challenge, so is spending too little. Having untrained staff, outdated computers, dilapidated furniture, and unmaintained buildings could lead to indirect costs and hinder the organization’s ability to serve the cause. It could also disrupt donors’ trust and reduce donations.
Non-cash Donation: Nonprofits sometimes raise a significant amount of non-cash funding, such as property, equipment, and shares. Such contributions have tax implications for both donors and the organization. If NPO managers fail to recognize the value of such gifts and their proper use, they may encounter budget issues.
How to Prepare a Budget for a Non-Profit Organization
Preparing a budget for non-profit organizations needs special consideration of the above budgeting challenges.
- Maintain Reserves for Special Circumstances: Nonprofits should expect the unexpected and keep a separate reserve for exceptional circumstances such as the exit of a large donor or a reserve for building renovation.
- Schedule Regular Fundraising Events: Not all fundraising events are successful. NPOs should continue to schedule these events, as fundraising is the primary source of funding for their budgets. If they raise significant funding, they should reserve it for days when they have low funding.
- Set milestones for every project: Nonprofits can break down a goal into smaller milestones with a time and funding requirement. They can then raise funds accordingly and achieve the goal one milestone at a time. This can help with budgeting, as it is easier and more practical to achieve smaller budgets than a bigger one.
Despite the above efforts, gaps, mistakes, and situations could put a non-profit organization in a budget deficit.
How Can a Non-Profit Organization Tackle a Budget Deficit
A nonprofit can face a budget deficit when expenses exceed donations. At times like these, organizations have to make tough decisions and focus on reducing deficits and stabilizing finances.
Step 1: Analyze the Deficit
Once you know your organization is nearing or in a budget deficit, the first step is to find answers to the following questions in your financial statements:
- How much is the deficit – small, manageable, or significant enough to threaten the sustainability of the organization?
- Which areas are underperforming – lower income, higher expenses, or a specific program or branch?
- Which areas are outperforming – a specific program or a particular large donor?
Knowing where the problem lies can help you target the pain point and yield effective results.
Step 2: Prioritize Programs and Cut Expenses
When the budget is tight, it is time to cut costs and make tough decisions about what stays and what is paused or scrapped. Review the expenses and programs and categorize them into core, variable, and nice-to-have.
- Allocate maximum resources to the core program that has the most significant impact.
- Reduce or pause funding to variable ones that have a lower impact.
- Consider deferring or scrapping the nice-to-have programs and expenses.
You have to be strict here as everything might look essential, but you don’t have the luxury of keeping it all. A professional can give you a pragmatic and data-driven justification of what is important and non-essential.
A similar approach can be used for expenses, where you can renegotiate vendor contracts, cut discretionary spending, and use budget-friendly alternatives.
Step 3: Increasing Revenue Streams
The primary source of income for nonprofits is donations. However, if a large donor backs out, the organization needs some income sources to make ends meet. They can consider options such as reaching out to new donors. The board members of the organizations are well-networked and can help raise funds. You can change the pitch and be transparent about the urgency of funding to get donations.
The organizations can also apply for grants, offer fee-based services, or sell products, such as cookies and greeting cards, to fund the program. Having diverse sources of revenue can help a nonprofit overcome a budget deficit and achieve financial stability.
Step 4: Communicate With Board and Stakeholders
A significant budget deficit is not just the manager’s problem but the entire organization’s problem. Communicating openly with the board, staff, volunteers, donors, and others associated with the organization can build trust and cooperation among all members. This could prevent the situation from worsening, such as donors and staff leaving.
These efforts can help a non-profit organization get back on track and regain its financial stability. A lesson learnt from such a crisis helps build a more sustainable economic plan. A professional could help you tackle such situations using their financial expertise.
Develop a System to Maintain Financial Stability
After tackling the budget deficit, it is time to rebuild a stable financial system that addresses the mistakes of the past. Some of the steps you took during the budget deficit can be incorporated to maintain financial stability.
- Periodically review your fundraising strategy and refine it to ensure its success. You can continue to diversify your income streams and streamline those that underperform.
- Consider investing in the organization’s efficiency, such as staff training, technology upgrades, process improvements, and cloud accounting. These investments can yield better results and resolve a problem before it snowballs into a crisis.
- Review your budgets periodically and reallocate money in high-performing programs and to strengthen reserves.
- Strengthen internal controls and set a process for financial reporting, and monthly financial checks that highlight gaps between actual and budgeted. This will help you monitor your spending and stay on track.
You can learn from others’ experiences and avoid a crisis by developing a system that ensures financial stability.
Contact Glenn Graydon Wright LLP in Oakville For Financial Planning and Budgeting of a Non-Profit Organization
A skilled accountant can help your not-for-profit organization set up a financial system, track expenses, prepare and analyze financial statements to build donors’ trust, and monitor the budget. At Glenn Graydon Wright LLP, our accountants and bookkeepers can provide services such as preparing financial statements, forecasting, and budgeting. To learn more about how Glenn Graydon Wright LLP can provide you with the best accounting and bookkeeping expertise, contact us today at 905-845-6633 or connect with us online to set up an initial consultation.