5 Common Nonprofit Budget Blemishes

5-Common-Nonprofit-Budget-Blemishes.jpg

Most nonprofits get their start with a founder who is passionate about the mission...not the numbers. Here are a few of the common budget blemishes that can result in a grant request blunder.

1. Your budget isn't actually a budget.

I may love your mission, but if I'm going to give you $25,000, I want to know you can manage it well, and hopefully multiply its impact through effective fundraising. Unfortunately, when you give me a budget that is simply a list of current revenue and expenses (like below), I lose confidence.

Budget Blunder 2

I kid you not, I've seen several budgets that were essentially set-up like this.  Make sure your budget looks like an actual annual operating budget, not a list of expenses that grows each month. It's a projection of an entire year's worth of revenue and expenses, based on history.

2. You have a big red negative number at the bottom.

No matter how much I love the redwoods, I really don't want to dump my money into a swirling drain of demise.

Often times, the budgets that are "in the red" are simply a misunderstanding. A budget shouldn't include only the revenue commitments you already have, it should include realistic revenue increases that you are pursuing. Young organizations will likely build new revenue into their budgets year after year until they stabilize. Just because you haven't received the $10,000 donation you need to close the gap yet doesn't mean you aren't going to.

If you're projections look like your heading for a major loss or bankruptcy (and, yes, nonprofits go bankrupt all the time), you either need to close your doors or devise a serious action plan for how you are going to course-correct. This should include both serious expense cut-backs and increased revenue strategies. Your budget should reflect realistic projections from those efforts (a lower, less worrisome, red number).

3. You have a positive number at the bottom.

Ideally, you should be crafting a zero-based budget. If you have a surplus, give it a name and move it up onto an expense line. If you are purposefully generating a surplus to build reserves (nonprofits should aim for at least 6 months of operating reserves), assign it as such.

If I'm a potential grantor, I want to give me money to the organization that needs it, not one that already has more than they know what to do with. Name every dollar based on how you will spend or save it, protecting yourself from the perception that you're running a money-making machine.

4. Your budget doesn't match reality. 

If you raised $5,000 in individual donations last year, you're probably not going to raise $500,000 this year. And if you have a salary line of $100,000, you better have a corresponding payroll tax/fringe benefits expense line.

A budget is a critical management tool that lets you know if you're winning or losing. It should be used as a constant guideline and substantiate your decisions as an executive. If you're budget is missing expected information - like annual insurance premiums, fringe benefits, professional fees (like the CPA for your 990 prep), or utilities, funders will wonder if you really have a grasp on all of your expenses, or if you're just shooting from the last balance on your bank statement.

5. Gaps from Missing In-Kind Revenue & Expenses

It can be difficult, especially when you're just starting out, to appropriately track and project in-kind revenue/expenses. But if you're mission relies on a hefty influx of in-kind support, your budget should reflect that. Otherwise, your description of your capacity won't match the figures in your budget.

For example, many nonprofits receive donated space. Get a letter from your lessor documenting the market value of the space and include that in your budget. Remember that in-kind revenue, such as donated space, volunteer services, or items used in your programs, generates an equal expense. It's a wash.

If you need a little help in the budget arena, don't go it alone. Either recruit financial expertise onto your Board or hire a consultant to help you get it right. If you just need a functional template, you can get one here. If you'd rather just send in the figures and come back on Monday with it done, I can also help with that.

There's no reason to work in your weaknesses. It doesn't serve you or your mission.

Got a budget question? Post it in the comments. Chances are, someone else is wondering the same thing.