An administrative assistant for the finance director at a nonprofit organization had a sign hanging over his desk: “No margin, no mission.”
For nonprofit organizations, having a surplus or margin is an important part of budgeting. Without budgeting for a surplus, you’ll end up scrambling to cover the inevitable times when donations do not meet goals or the roof starts leaking, necessitating an emergency repair.
Budgeting for a surplus builds up that cushion against a rainy day so that you can continue with your activities undaunted by unexpected expenses.
Budgeting for Surplus
Many nonprofits respond to shortfalls by cutting spending. There’s nothing wrong with such an approach and it can be a healthy way to keep expenses from going up. However, you can’t always cut expenses. There comes a time when expenses are cut to the quick and there’s nothing else to cut.
That’s when budgeting for a surplus comes in handy.
Budgeting for a surplus means establishing an annual surplus goal and setting aside an amount to put into the surplus fund just as you would set aside money for your operating budget, marketing budget, salaries and wages and so forth.
Mandating a surplus is the first step towards achieving a comfortable reserve. Nonprofits mandating towards surplus typically begin during the budgeting cycle by starting a budget from scratch, keeping a set figure in the baseline budget for a surplus amount. By counting the surplus from the start as a line item on the budget, it’s already built into the budget and part of the goals to achieve. It becomes an integral part of the budget rather than an item to add later.
A happy circumstance for any nonprofit is exceeding its financial goals for the year. If your organization finds itself ahead financially, the Finance Committee can negotiate with the managers to lower the surplus over a period of one to several years. This spreads the benefit of a boom year across multiple years and maintains a surplus without keeping too much in reserve.
To budget for a surplus, you must marry a reasonable approach to budgeting with an encouraging nod towards cutting expenses. You can’t control income, only influence it through activities. Expenses, however, can, for the most part, be controlled. Yet there are some fixed expenses that must be maintained for the good of the organization, such as rent, health insurance, and so on.
Balancing the need to cut expenses with the need for a surplus can be challenging. Including representatives from all departments in the budgeting process helps accounting and finance see the big picture view and understand potential conflicts in the budgeting cycle.
Final Thoughts on Surplus Budgeting
Obtaining surplus margin ensures that your nonprofit organization can weather the storms of recession, unexpected expenses, or boom years when donations and other revenue sources flow into the organization.
Additional tips for surplus budget include:
* Analyze the organization’s current budget and balance sheet to understand all potential sources of revenues and expenses.
* Communicate and educate all departments on how to read the budgets and financial statements. Help team leaders understand how their contributions to each budget line impact the whole.
* Develop consensus on the surplus budget amount.
* Align organization-wide goals to achieving the surplus.
* Develop strategic plans, marketing, and operational plans that support goals.
With the right planning, you too can have enough margin to achieve your mission – and a surplus, too. Budgeting towards surplus is an achievable goal.
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your budgeting processes along with many other accounting needs. We offer hands-on training as well as online webinars to take you to the next level with your fund accounting system. Check out the full schedule of our training events here.