Budgeting is tricky. At best, you get close to an accurate forecast. At worst, you’re wildly off. Corporations adjust budgets all the time. So do nonprofits. In fact, nonprofits have a tougher time budgeting because of the uncertainties surrounding their work and their finances.
Budgeting Can Be Tricky
Nonprofits are founded on a cause and a mission. While some do sell products or services, they do not rely solely on sales to support the budget. Most rely on donations, grants, and endowments to continue their mission, and that’s where budgeting gets dicey.
Look, even companies get their budgets wrong. They can’t predict catastrophic weather conditions that ruin crops; geopolitical events that shut down shipping; or sudden quality issues that threaten their whole supply chain. Nonprofits face different uncertainties. Donors who once flocked to the cause find another cause to support. An economic downturn leaves once-generous givers unable to open their pocketbooks and donate, even if their hearts remain open to the cause. Grants can dry up. Federal funds can cease if Congress halts the money or diverts it elsewhere. Costs escalate.
Given all of these uncertainties, how in the world is your organization expected to budget with any sense of accuracy? Here’s where the right software can make a big difference. With the right software, past patterns can be tracked, analyzed, and used to predict the future. And while no software has an accurate crystal ball, the right platform can help with budgeting as well as analyzing best- and worst-case scenarios.
Plan for the Worst, Hope for the Best: Scenario Planning
You’re probably doing scenario planning all the time—you just don’t know it. It’s when you take an umbrella along “just in case” on your afternoon walk because a few clouds are on the horizon and the weather app predicts a 30% chance of rain. There’s a chance, so you plan for the worst by taking the umbrella along but hope for the best by keeping it rolled up and tucked under your arm.
The same goes for budgeting. Many organizations forget scenario planning when it comes to budgeting and instead believe that the budget they developed for the upcoming year is accurate. It may be, but more likely, unforeseen events will occur that tilt the budget higher (better results from fundraising events) or lower (the rent just increased).
Scenario planning enables you to put into practice both best and worst-case scenarios so that you have a budget ready no matter what happens. This enables you to think ahead, for example, should costs rise and funds dry up. What activities can be cut? How will you continue to pay for essentials such as salaries, rent, and insurance if major grants are discontinued or federal funding ceases? By thinking through each scenario, you have an action plan in place and can course-correct as the year progresses.
The same may hold true for surplus years. Should additional funds flow into the organization, you’ll have a best-case scenario ready to go. Either way, no matter what the future holds for you, you will be ready for it.
Diversify Funding Sources
Many nonprofits rely on federal and state funds, such as grants, to support their programs. Relying solely on these funds is risky. You cannot predict, for example, when such funds will be discontinued or reduced. A new administration or competing interests may result in a grant or funding source being completely shut off, in which case, if you don’t have additional income streams, your organization could face serious difficulties.
Additionally, even if funds are still earmarked for your organization, payment delays could seriously hurt your cash flow. It’s never a good idea to put all your eggs in one basket. Even if you feel that a grant is secure, you cannot be certain of it. Diversifying income streams is a smart idea for all businesses, including nonprofits.
Managing Restricted and Unrestricted Funds Carefully
Restricted funds are earmarked for specific program or activity lines, while unrestricted funds can be used for any expense. Nonprofits must have policies in place governing the use of both types of funding. Unfortunately, unrestricted funds are often in short supply. What then?
Some organizations have written guidelines allowing borrowing from restricted funds. Clear, unambiguous repayment terms must accompany such borrowing; you cannot shuffle money back and forth at will. Another idea is to build fundraising campaigns solely around shoring up your unrestricted funds. Such campaigns emphasize how the organization fulfills its mission so that donors understand why unrestricted funds are needed. And continually educating the public about how your organization manages its unrestricted funds, by being transparent in reporting your organization’s financial reports, is essential to generating goodwill and building trust with donors.
The Right Software Makes Budgeting Easier
So how do organizations run best- and worst-case scenarios and manage restricted and unrestricted funds carefully? With spreadsheets?
You know what we’re going to say—spreadsheets are not the answer. Sure, they’re easy and accessible, but as your organization grows, they become unwieldy. It gets harder and harder to manage them, the chance of mistakes through simple keying errors grows, and it’s almost impossible to get good reports and data visualizations from them.
Instead of spreadsheets, smart nonprofits use nonprofit accounting software to build and manage budgets, run reports, and gain visibility into their financial position to ensure they have a solid foundation.
MIP Fund Accounting offers a great solution for nonprofits seeking a true fund accounting platform. Unlike small-business accounting software, MIP Fund Accounting is designed for nonprofits. It tracks expenses and revenues by program line, helps you build solid reports for your board and constituents, and enables you to track the metrics that matter.
We’ve also found a great solution for nonprofits in Martus, a data reporting platform that works with MIP Fund Accounting to produce outstanding reports. When you need to build trust with donors and constituents, nothing beats good reporting on your activities. Martus with MIP Cloud enables you to build better budgets, generate reports, and improve planning thanks to its seamless integration and robust interface. Separately, MIP and Martus are great platforms. Together? A powerhouse budgeting and reporting solution.
The Future Is Unpredictable. Your Software Doesn’t Have to Be.
The future has always been uncertain. However, you can smooth out some of the uncertainty with the right software. It won’t solve all your budgeting problems, but it will give you the facts you need to make better decisions and build a better future for your organization.
Welter Consulting
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.
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