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20 Feb

The Art Of Budgeting

The Art Of Budgeting

Most nonprofit organizations use budgets as limiting expenses and base these budgets only on trends of previous years. It’s simple to say let’s spend 20% less than last year, let’s make 10% more than last year. Unfortunately, this is not the purpose of an effective budget. This practice reduces the stability of nonprofit organizations and threatens their ability to fulfill their mission and accomplish community impact.

A budget is a policy. That policy instructs all employees, donors, volunteers, and board members what activities are necessary to maintain and sustain the organization’s mission. It does not suggest limits or restraints, it is designed to create what good looks like. It is designed to accomplish all the goals and dreams of a nonprofit organization for the current year and three years in the future. Let’s be clear: if you only budget year to year or month to month, your existence is limited to that time frame. If you budget for now and for the future, you are creating a policy for growing or sustaining your mission over time. 

I realize this may be a difficult change for some senior managers because of what you may have done before. Keep in mind that repeating a bad practice can only cause bad outcomes such as downsizing, limiting potential, and donor fatigue. 

The art of budgeting requires several important steps to create a policy people can rally support:


Your Mindset 

Stop thinking of budget as restrictive. A budget is about fulfilling dreams. Instead of focusing on revenue first, create expenses and investments first. Make a wish list of all the support, staff, and capital necessary to fulfill your mission now and three years from now. Be as extensive as possible. Your mindset should remove all barriers, including money, in order to create a comprehensive and impactful list of expenses. 

Once expenses are listed and supported by stakeholders, create a diverse revenue stream to support the needs of the organization. In a previous article I provided 16 different revenue streams for a nonprofit. If you are only using three, increase your revenue streams to five or seven depending on the needs of the organization. Remember, the United States will never run out of money. The art of budgeting is creating a diverse revenue stream to find the money your organization needs to fulfill its dreams. 

Building Reserves


The art of budgeting is creating a policy that is designed to sustain your mission over time. Within your budget, there must be a policy to create reserves, funds to be used in future years. This can be accomplished by including a revenue budget of 20% of your total income as your goal for reserves. Most foundations require a nonprofit organization have six months of reserves to qualify for funding. Reserves can also be accomplished through major gifts and legacy gifts. Hiring the right people or team to manage these efforts for your organization is a best practice. A policy to build reserves is for all levels of nonprofit organizations. You cannot use an excuse of “we’re too small” or “we don’t have enough help”. Your role as a nonprofit leader is to find a way and never give up. 


Proper Estimates

Most nonprofit organizations under estimate their financial needs. A simple example is when an organization wants to hire a new staff person. The senior manager decides, based on a limiting budget, the salary should be $45,000 a year. Then, the organization applies for a $45,000 grant to cover the cost. A proper estimate is looking at all costs associated with this hire. Some examples include: 

  1. 50% percentile of salary paid in your community. Use to properly establish compensation to be competitive and retain your staff. 
  2. Budget a 30% fringe cost for benefits, payroll taxes, and other payroll expenses. 
  3. Budget the cost of recruiting including but not limited to the cost of ads, the time it takes to review resumes and interview, and the time it takes to communicate throughout the recruiting process. 
  4. Budget the cost of onboarding, certification(s), equipment, business cards, and any other anticipated expenses.
  5. Budget the cost of training this individual over a six month period or as required for the position.

I often explain that the word “nonprofit” is a tax exempt status not a business plan. If you properly estimate all of your expenses you will be able to plan revenues to cover any and all costs. If anticipated costs do not come to fruition then you have just added to your reserves; fulfilling the dreams of the organization.

Consistent and Constant


Your budget should be a living and breathing policy that is reviewed and updated constantly and consistently. If you allow your budget to sit on a shelf to collect dust, then your nonprofit will not reach its true potential. One example is to allow a grant to be ignored and the organization over spends the original grant causing a loss which must be covered from another revenue source.

The best practice is to engage a budget committee that will monitor and update your budget. When creating your budget it is advised to include stakeholders beyond your budget committee to provide insight into the needs of the organization. This can include employees, people you serve, volunteers, government officials and religious leaders. It’s important to involve your employees during the budgeting process because ultimately it is your employees that must follow and maintain the budget to ensure success. The more your employees know and commit to the budget, the easier it is to implement. 

Ultimately the board of directors are financial responsible for the organization and must approve the budget but the process cannot stop there. The committee cannot only provide monthly updates to the board but must go beyond paper reports and provide insights to what activities have proven to be successful in maintaining and growing the organization’s mission and who is served. 


Don’t Confuse Activity With Accomplishment

It is easy to hand out a budget and tell your team to “make it happen”. Your team will always be busy, at times, working 60 to 70 hours a week to manage your budget. Don’t confuse activity with accomplishment. Just because your staff is busy does not mean you are accomplishing the goals and dreams of your organization.

It is a best practice to include specific and measurable goals to your budget to increase accomplishment. For example, if there is an expense for a program, then the program should have a goal of inviting 100 participants with the goal of an 80% turn out for each program. Some activities that will accomplish this goal can include the number of emails sent to potential participants, a specific response rate to social media postings, a specific response to a website posting, and calling a specific number of previous participants in order to invite them to the new program. Because these activities can be measured, they become transparent and easy to notice. Without transparency, one can’t manage what they don’t see. When activities can be measured and monitored over time, the organization will experience a higher rate of achievement.  

Another example is requiring that 5 grants are submitted each month with a minimum request of $10,000. You can also include an activity to hold five meetings each week (in-person or zoom) with potential donors and established donors to acquire $100,000 in additional funding. 

The practice of developing specific and measurable activities is not easy. It can take time and many revisions to get it right. Based on best practices, developing activities has been proven to be worth the time based on the results or return on investment.

Problem Solving


There is a famous saying: When you make plans, God laughs. Budgets don’t always work out and when something bad happens, it is usually a surprise to senior management. Don’t pick the easiest way out. To manage an effective policy like a budget you need to be a great problem solver. One rule of problem solving is collaborating. The insight you gain from a diverse group of supporters will help you problem solve and keep your organization successful. Remember, most problems have solutions and it is your responsibility to the organization and to the community to exhaust all possible solutions. 

One best practice is to create several scenarios that can have a negative impact on your budget. Each scenario is written down and a list of potential solutions are developed by collaborating and using best practices. Once this document is complete, it’s filed away and can be used in the event the scenario becomes reality. Using this best practices prepares the organization for issues that arise and will help the organization navigate with confidence and success.  

The art of budgeting is a complex process of creating a policy that secures your organization’s mission for the next three years. These easy steps are necessary to realize the true potential of the organization and the community you serve. If you need help or have difficulty navigating this process, ask for help. It’s not a sign of weakness to ask for help, it’s a sign of your commitment to helping fulfill a mission that is important to your community.

By Brad Lebowsky, CEO NEA, LLC

Growing people, communities, and resources for exempt organizations.

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