A nonprofit organization’s budget tells a story of its health, priorities and personality. The budget should align with its strategy, and the strategy should align with its mission. In other words, the organization’s budget should serve as a game plan to accomplish the mission. Budgeting, if done correctly, has the power to enhance teamwork and cooperation across the organization.
“Starting the strategy and budget process in prayer allows God to reveal what he wants to accomplish through the organization.”
So where should leaders begin? Here are eight keys for effective nonprofit budgeting.
- Start with Prayer
The Bible says in Proverbs 16:3 to “Commit to the LORD whatever you do, and he will establish your plans.” Starting the strategy and budget process in prayer allows God to reveal what he wants to accomplish through the organization. Leadership should commit to do whatever God asks of the organization.
- Prioritize Initiatives
It won’t come as a surprise that nonprofit organizations have very limited resources. Therefore, organizations should prioritize and fund initiatives based on how closely each initiative aligns with the overall strategy.
Once the initiatives are prioritized, they should be communicated to budget managers. Think of budget building as a team sport. The more engaged a budget manager feels, the higher the tendency will be to take ownership and share responsibility for outcomes.The organization should schedule individual meetings between leaders of its finance team (the budget owner), and its individual budget managers. These meetings provide a platform for budget managers to voice concerns and ask questions. Managers should be given a reasonable threshold for mid-year budget changes; small changes need not be approved individually. Allowing for small changes increases efficiency, communicates trust and typically has little impact to the bottom line of the organization.
- Project Revenue, Expenses and Income
The next step is to develop realistic revenue goals. An organization should base revenue targets on realistic expectations and only include foreseeable revenue in the budget. Never increase revenue projections to fill the gap to cover expenses. This sets up the organization for a budget deficit if it fails to achieve the “plugged” revenue goal. Nothing decreases cooperation and ownership more quickly than asking budget managers to achieve unrealistic revenue goals.Leadership must decide how much income to flow to the bottom line. The term “profit” typically has a negative connotation for a nonprofit organization; however, organizations should plan for it. Not only do profits provide a cushion for unforeseen events and circumstances, profits also provides the funding needed for capital projects, infrastructure improvements and growth.Once revenue and income goals are set, the organization should start budgeting for expenses. It is helpful to enter fixed and revenue generating expenses (rent, compensation, utilities, etc.) before discretionary ones.
- Capital Budget
An organization's financial plans include budgets for operations (which we have already discussed) and for capital. Building and maintaining a small reserve should be the number one priority. This gives your organization flexibility to absorb temporary changes in circumstance without the need for external loans. Just as with the operating budget, leadership should prioritize capital requests that align most closely with the strategy, and fund higher priority requests first.
- Cash Flow
Understanding your organization’s cash cycle is critical. This allows leadership to plan the timing of each major spend and helps prevent overspend during leaner months. Leaders should plan major expenses around the times when cash tends to be the highest.
- Review and Analyze
Look at three consecutive years of financial results, two prior years plus the current one, to provide context for the budget. This allows the organization to quickly spot and explain any areas that look out of line with prior years. It also helps highlight the effects of any one-time expenses in a given year.During this phase of the budget process, leaders should identify the risks in the budget (funding losses, decreased registrations, etc.) and a potential contingency plan for each major risk.
- Present to the Board
Keep the board focused on the big stuff – issues and opportunities that have real impact. Use the rule of threes. What are the three most important takeaways for each category? Keep materials and discussions high level to help focus on the big rocks.
Following these simple steps will lead to increased financial stewardship, collaboration and communication across your nonprofit organization.
Jennifer Bridges is the Finance Director at FamilyLife®, a ministry of Cru. Learn more at (familylife.com). She holds a Master’s degree in Business Administration from the University of Arkansas and a Certified Public Accountant license. She is a member of Christian Leadership Alliance’s national Advisory Council for Financial Management.