Is there such a thing as an ideal budgeting strategy? Ask any business, and they’ll say no. Despite the big bucks, even business giants and multinational corporations face budgeting challenges. Then imagine what a non-profit organization (NPO), whose primary aim is to do social good and relies on external funding for all its activities, must be facing. How do you make an annual budget when you aren’t even sure how much money you’ll be getting in the coming year?

Unique Challenges of Non-Profit Budgeting 

For most businesses, budgeting is straightforward: based on your past performance and future revenue forecasts, you need to plan your annual expenses, purchases, and growth activities. But when it comes to NPOs, there is no such past performance to rely on. Every financial year is a brand-new challenge, and there is no way to forecast how much funding can be expected or how your expenses may vary this year. Let’s look at some of the unique challenges faced by non-profits that make budgeting for them so difficult:

• Revenue Unpredictability: A non-profit’s “product” is its social cause and purpose. They do not sell any tangible products or services to earn revenue. Instead, they depend on donations from individuals and grants from the government or other institutions to achieve their goals. And even such funding is not guaranteed. Sometimes you might get a windfall of funds; at other times, funding channels run dry for months, making budgeting and cash flow management a nightmare.
• Restricted Funding: Even when non-profits receive funds, many donors give donations for specific purposes, such as funding meals for volunteers or paying only for children’s education. Such funds cannot be redirected to pay for more pressing issues, such as a leaking roof or overdue bills, which binds the accountant from making optimum use of the money.
• Miscalculating Costs: With no reliable historical data to guide them, non-profits often struggle to put a number on their financial needs. In fact, they sometimes present figures that are underestimated to appease potential donors. However, such miscalculations or downplaying of actual expenses can worsen your budgeting problems, as you might end up with insufficient funds to cover even basic operational or utility expenses.
• Assessing Outcome: While for-profit businesses assess their success on profitability margins, non-profits gauge their success on the outcomes of their activities. But social outcomes cannot always be measured in numbers or dollars. This makes it difficult to gauge whether your spending is really helping you achieve your goals, and consequently makes resource allocation during budgeting difficult. 

Apart from these factors, non-profits struggle to maintain contingency funds and to align with grant cycles. They have limited resources for long-term goals and rely on outdated data to plan upcoming program budgets.

Unique financial problems require unique budgeting solutions. How can an NPO tackle these challenges to chalk out a budgeting blueprint that is effective, efficient, and progressive?

How To Make a Non-Profit Budget That Actually Works? 

The first step to preparing a budget for an NPO is deciding on your goals for the coming year. Unlike a for-profit business, a nonprofit has to determine which programs to run and then build a budget around them. After zeroing in on specific programs, you calculate the costs associated with each one, plan for required staff and other support systems, and then look for ways to fund either the entire program or specific parts of it.

Here are some points to consider when preparing a workable budget for a mission-oriented, non-profit organization.

1. Planning for Funding Seasonality and Best and Worst Scenarios

NPOs rely primarily on donations, grants, and other funding sources. But even this funding is seasonal. For instance, in times of rising inflation or market downturns, donors tend to put charity on the back burner, creating revenue shortages for non-profits. Moreover, a lack of revenue also means less savings for a contingency fund. 

The silver lining to these problems is that there are also periods when funding and grants are plentiful. This presents an opportunity to balance cyclical variations and create budget models tailored to different potential outcomes. 

Suppose your non-profit runs a food drive that serves around 500 people, with an individual financial aid requirement of $50 per person. In the best-case scenario, you collect donations totalling over $1 million from various sources. With this money, you could expand your program to feed more people, hire additional staff, and even use it to publicize the cause and raise more funds. Some of this money can also be put into a contingency fund. 

In the worst-case scenario, donations dry up by over 40%, making it hard to feed even 500 people while covering operational costs. At such times, you might be forced to reduce food quantities, cancel non-priority programs, and tap the contingency fund.

Understanding these dynamic revenue changes and preparing an accommodative budget is key to navigating funding seasonality.

2. Managing Restricted and Unrestricted Funds

Restricted funding prevents non-profits from using the money for addressing other pressing issues, such as urgent operational requirements. For this, non-profits have to rely on unrestricted funds, which are often short in supply. One way to address this is to establish internal policies that allow borrowing from restricted funds, subject to strict repayment terms. Another is to pool your resources with other NPOs with similar needs, such as building maintenance, to organize a targeted awareness drive and ask the community for help. By explaining how their donations will help improve the lives of their less fortunate fellow citizens, you can encourage them to participate in your program as well.

3. Basing Your Budget on Impact

Every program your non-profit undertakes is only as effective as its outcome or impact. Therefore, it is necessary to highlight how your program intends to fulfil its social goal with the donations or grants it receives. Think of ways to make your impact measurable. For example, if you run a square meal program for the malnourished or elderly, try tracking the nutritional improvement in the beneficiaries over the year, while also giving the breakdown of the food cost per person. 

Say if out of 200 beneficiaries, over 100 show marked improvement at a relatively reasonable per-person cost, the program is likely to be considered a success and may garner more donations. However, if only 40 people show improvement at a high cost, you might want to revise the program or cancel it and allocate those funds to another program. 

Setting such metrics to evaluate impact is important for justifying your stance to a potential donor. Only when they see the returns – or in this case, the impact their donations are making – will they be interested in continuing their relationship with your organization and referring it to other interested people.

4. Rolling Budget

Another tip is to make a rolling budget that evolves as the year progresses, rather than a fixed one set at the beginning of the year. This way, you can adjust your spending to real-time funding situations, reallocate resources to urgent matters, and respond quickly to any variations in the macroeconomic spectrum.

The donors, staff, board members, and the general community are all stakeholders of an NPO. It is through their united efforts that financial difficulties can be effectively addressed. Drawing on insights from all these people can help you create a practical, optimistic budget for NPOs. 

Contact Ford Keast LLP in London to Help You with NPO Budgeting

A business consultant can help your NPO with financial budgeting, studying the impact of different programs, and raising funding. At Ford Keast LLP, our accountants and financial consultants can provide services including account preparation, budgeting, and cost optimization. To learn more about how Ford Keast LLP can provide you with the best accounting and financial consulting expertise, contact us online or call us at 519-679-9330.