Mastering the Art of Budgeting for Non-Profit Organizations - Part 1

Announcer: 0:03

Welcome to the Practice of Non-Profit Leadership, a podcast specifically designed for executive directors of non-profit organizations. With a touch of humor, your co-hosts, tim and Nathan, work to provide encouragement, insights and practical strategies to help you be a more effective leader. And now here's Tim and Nathan.

Tim Barnes: 0:26

Welcome to episode 111 of the Practice of Non-Profit Leadership. I'm Tim Barnes and I'm Nathan Ruby. Well, nathan, how do you feel about budgets, especially, I'm thinking, budgets for your non-profit?

Nathan Ruby: 0:42

Well, to be honest, Tim, when you said the word budget there a few seconds ago, I can start to feel the headache coming on in my head. That is my reaction to spreadsheets and budgets is a headache.

Tim Barnes: 0:57

Well, I know, if we were talking about fundraising, you'd be so excited, but fundraising has to go. The funds that come in have to go somewhere, and that's where the budget comes in. And as we record this episode, we are in the final two months of 2023, which is just craziness. I can't believe it. But many non-profits are working hard on their end of the year push to close the year in the black, and while that's happening, some of us are beginning to work on the 2024 budget, which is where I'm at at the moment.

Nathan Ruby: 1:32

Absolutely. It is just like right around the corner and this time of year you're really as executive directors and leaders, we're really watching two things at once. We're planning for next year and what that's going to look like, but we're also keenly aware oh, I like that word, tim keenly Is that a word I know?

Announcer: 1:51

keen is.

Nathan Ruby: 1:52

I don't know if keenly is, but we're keenly aware of how we're going to finish the year and especially finance and so having a great financial end of year, end of calendar year that could get some momentum going into next year. So we've got to watch both sides of that.

Tim Barnes: 2:11

You're absolutely right on that.

Nathan Ruby: 2:13

Yeah, in spite of that tension, tim, I thought it would be good to dive into budgeting, a key responsibility for every executive director. Now, of course, you need to work closely. If you have a finance team, finance staff or finance team or finance committee, you know you probably have one for your board, but you always need to work closely with your finance committee on that. But our focus on budgeting is going to span two episodes. Today, we're going to start with some key tips on budgeting preparation and then next week, we're going to look more specific at revenue and expenses. So, tim, you're going to lead us through this today, so what do you got for us?

Tim Barnes: 2:57

Well, nathan, as I just mentioned, I'm right in the middle of this for my organization, so I am primed and ready to go. So let's dive in. So today, as you think about getting ready to put your budget together, we have five tips, I guess, five things that we believe you should consider as you begin to do that work, and here's number one. The first one is start with a plan. Simple, right, but Nathan and I were talking about how many times we've seen especially, I think, smaller nonprofits. They just think when they get ready to do a budget, they just jump in and like, okay, well, let's, let's make a few tweaks here from last year, maybe change one or two things a little less here, a little more there. Okay, we're good to go.

Nathan Ruby: 3:52

What are you talking about? Yeah, you know, and I have to raise my hand because I personally have been guilty of that, because I put it off and I put it off, and I put it off. And then all of a sudden it's like, oh my gosh, the board meetings next week and we don't have the budget ready, and so, yeah, we'll just add a little bit to last year. Call it good, let's roll. And that is not the way to do it, tim.

Tim Barnes: 4:15

Well, I would agree, and I think you've got to go back. You've got to start with your mission and your vision. What are you trying to do and what does it look like when you do that? You have to start with a plan and I think also even taking a little bit of time to say, okay, where are we right now in that mission? Where are we and where do we want to go? How are we going to carry out that mission this year? Because that's going to require resources to do that work. So, as we think about where are we and where we want to go, I think we should have some conversation around. What are the opportunities in front of us? What's changed? What's opened up? What's there in front of us that maybe we should be leaning into? What needs do we have? And that could be program needs, that could be infrastructure needs. We talked about that earlier too. Nathan, you know that program is what really drives you, but you've got to have the foundation under the program to be able to do the work, which includes your infrastructure. So where are we are with infrastructure? What do we need and what's it going to cost? And it's a great time also, as you budget, to ask the question what's working and what's not working? Again, you're kind of reviewing where you are as an organization.

Nathan Ruby: 5:43

Yeah, actually this week, tim. It's funny we're doing this topic today because we had staff meeting earlier this week and one of our on the ground leader, our country director we're in a conversation and we're seeing a pretty good uptick in numbers coming through our programming and his comment was we're not thinking big enough. Our vision is not big enough for the current need that we have. We have to think bigger. My first response is how awesome is that? Not that the need is getting bigger because we're medical, so that's not necessarily a good thing, but that staff is recognizing our vision for who we think we are needs to grow and get bigger faster. So that was awesome. That staff was recognizing that. And then the next thing I thought of oh my God, how are we going to pay for that? We're going to pay for that, and when you look at what it takes in a nonprofit, when you talk about paying for program, that's revenue, and revenue is fundraising Well, it's also accounting support and system support and computers and program, all this stuff that goes along with that. And so it's. Nothing is isolated, nothing happens within a silo and everything impacts everything else. So, as you and if you don't, I think, during this planning process. Tim, this is when you have to be thinking about that stuff, because one way to kill growth and to kill the future of an organization is to not be thinking about this stuff. Now and now, when you're doing the budget, that's when you need to be thinking about it.

Tim Barnes: 7:30

And I think as you renew that vision, as you see the bigger picture, you see the opportunities. You can get excited about it. That also brings energy to the fundraising. That brings energy to looking for resources If you really know where you're headed. People don't want to hear like well, we tweaked a couple of things, we're going forward, we're going to do about what we did last year, yeah, okay.

Nathan Ruby: 7:53

Hey, mr and Mrs Doner, we need you to give more this year, but you know, we're just going to basically just kind of do what we did last year, but we'd really like for you to give more. That doesn't work, tim.

Tim Barnes: 8:07

Yeah, I agree. So anyway, it's taking the time to get the plan together, asking some of these questions, doing some reviews, looking ahead and coming out of that with some goals and objectives of what you really want to see happen in the new year. We need to plan first, and then we get to the numbers. If we have our plan, then we can begin to accurately think about what are the numbers? What's it going to take to move forward? So start with the plan, put that in your schedule, take some time. It doesn't have to be a huge week-long retreat to figure it all out, but it's just taking some intentional time to ask some of those questions as well. The second point is to engage the stakeholders as you start to think about budgeting, engage the stakeholders of your organization. Now you might be the person who's going to actually write the numbers down on the sheet or whatever, or type them in and put it together. Nathan, I remember a conversation we had. You were talking about how easy it is to kind of get tunnel vision when you kind of dive into all these numbers and you're thinking about the plans and all that, and you really need some outside perspective, right?

Nathan Ruby: 9:26

Yeah, and think back at times where you've written a drug mail piece or you've written a letter to somebody or an email to someone and you have gone over it again and again, and again and you've refined it and you've edited it and you've looked at it and changed it six, seven, eight, nine times, and then you have somebody else read it and it's like, oh, this word's misspelled, you missed this comma. And it's like I've read that thing nine times. How did I miss that? And so it's kind of the same way with this, and especially for executive directors that are leading smaller organizations and you might be the finance department. And so if you're the one that's plugging those numbers in, you get down deep into the weeds and is our snow removal going to go up this year, yes or no? And into that level of detail. And when that happens, I think you lose the perspective of the bigger themes. The, tim, just like what you were talking about, is what does this say about our values? And there's always a saying that says you can see what somebody's values are by how they spend their money. Same way with an organization, tim, and I could tell you what your organizational values are by looking at your budget. And so if you're deep into that, into the weeds, you miss those larger, overreaching themes. And then the opposite is true also, tim If you're not responsible for those somebody else is putting in those details you can miss things. Like going back to the snow example. Maybe your snow removal triples and maybe that's not such a big deal, but maybe some of your other expenses will double or triple. And you're looking at the big themes but you're missing some of those details that one line item on its own is not a big deal, but if you have six or seven or eight of your line items in the budget where you're having double or triple, that makes a difference. So, yeah, you need to have other people besides you looking at this as you're putting it together.

Tim Barnes: 11:44

So let's talk about some of our stakeholders. We should be a part of this process as we talk about it. Obviously, board members are key stakeholders because in most cases, they're going to give their approval to the final budget. So, having them engaged in the conversation, again, you're engaging them around the plans, around what's happening, and you have board members maybe that have insights, maybe if somebody's really good economically, looking around and saying, hey, here's where I think we're going to be as a country, and this may impact X, y and Z, or you may have somebody who's really good in finance or whatever, but it's good to have them engaged. Obviously, you want your staff or key volunteers involved in some of this conversation, particularly those who are running programs and finding out hey, what are you dreaming about, what are you thinking about, how is this, what are you going to need as we go further? And so you want your staff or key volunteers involved in that conversation. I think you would agree, nathan, it would be good to have some conversation with some key donors. As you're putting your budget together and some of the things you're thinking about. It'd be good to have a couple of them hearing what you're thinking and seeing if they're going to respond to that. If they could get excited about what?

Nathan Ruby: 13:06

you're doing? Yeah, absolutely. And if you're a $100,000 budget and you have a $5,000 donor, that represents 5% of your income you might want to go talk to them and say, hey, here's what we're looking at doing this year, here's the outcomes, here's what it's going to cost, what's it looking like for you this year? And I do that. I don't give them the whole budget where they have every line item, but I do the things. This is what we're spending on programs. Here's the program breakdown, here's what we're spending on fundraising. And, yes, so we do have those conversations Pretty important.

Tim Barnes: 13:47

You might even consider having conversations with some community leaders or influencers. Are things changing in your local community? Maybe even talking to other nonprofit leaders as well? What are they thinking about? What's in their view? I think that's really beneficial, and I would even say having some conversations around the beneficiaries of the programs that you're running. So, having conversation, what can you learn from them? They're actually benefiting from the work that you're doing. Wouldn't it be good to get some input from them as to where they're headed, what they see, what they think about what you're doing? So it's just important to look at who has a stake in this organization as you think about how you're going to run your program and how you're going to fund it. It would be great to have those conversations moving forward. A third thing would be what I call past performance analysis. Sounds really big three words Past performance analysis.

Nathan Ruby: 14:51

Fancy Tim, I know.

Tim Barnes: 14:54

And I think it's important. If you've invested, you know that your stock broker or your financial advisor will always come up with a statement that past performance doesn't guarantee continued success. Looking at past performance, looking at some of the historical data, is really important as you think about your budget. I have forums that I look at. I have reports that I look at as I think about putting together our budget and I can look over the last few years and see, hey, here are typically kind of high times for resources to come in. I can also identify what month during the year that we seem to hit our lowest point. And as you put a budget together, as you think about how that's all going to pan out, you think about cash flow. Being able to look at how things have floated in the past can help you make good decisions Look for patterns, look for trends, and how is that going to impact the way that you put your budget together?

Nathan Ruby: 16:00

Yeah, tim, the trends are so important so that when questions come up from board members, you can have confident answers. So this happens to us all the time. So in our fundraising strategies and tactics, like a lot of organizations, we are fourth quarter heavy in our revenue and in our fundraising strategies and we're like a lot of organizations we have probably 40% 45% of our revenue come in in the fourth quarter, which means that, from a cash flow perspective, august, early September, late August, early September, is, from a cash flow perspective, is our lowest point of the year always is every year, and we have a September board meeting. So we have a board meeting that is literally at the same time of our lowest fund balances of the year. And every year there's concern as board members are looking at the numbers and it's the board's responsibility to make sure that we're solvent and there's enough money in the checking account for payroll and all that. And it happened again this year and there was some concern and it was like here's the trends, this happens every year, we're going to be okay. This is the bottom of the year. We've got some tactics that are going out in the next two weeks, three weeks, and you will start to see the uptrend and sure enough it's been this way every year. And about two weeks later money started coming in and started to flow in and that trend started to go up. So some of that is knowing this and understanding those patterns so that when board members or other stakeholders these questions come up, you can confidently say here's what we're expecting to happen. And when you can respond confidently as the leader, nine times out of 10, your board will say oh, okay, and it doesn't become a big issue.

Tim Barnes: 18:12

And you can tell anomalies as well. So you may be in the, you may look at what's going on this year and you see things that you've not seen before and you're like, okay, I got to ask questions why did we miss budget? Did we not put something in? We should have put in? So having that, having that information, it could be we do. A monthly management report gives basically a snapshot of where we are. I can see, you know, four or five different key metrics and you get you need to find out what works for you. But I always go back to the management reports. I look at trend lines, I look at past budgets, I look at end of the year reports where we end up, and I try to bring all that together as I'm thinking about our plan, as I'm thinking about our budget, what things do I need to make sure I'm thinking about as we put all those things together? So it's important to be looking at some of the past performance, the documents.

Nathan Ruby: 19:08

Yeah and Tim, and this is where your board boards in general are there to help you. They're not there to be adversaries. They're not there to make your life difficult although once in a while that happens but they're there to help you. And so, on these trends and on this budgeting process, don't hide things from them. Don't not report negative news or downplay negative news. They need to know that because they're there to help you and there are ideas that they may have or they could kick into higher gear on some fundraising help, but they're there to help you and support you. And if they, you don't want to blindside them. You don't want to end up at the October board meeting and say, yeah, we had this fundraiser that we've done every year back in March or April and it didn't perform the way we thought it was. So we've been not hitting our numbers all year for that. Don't let them know about that in October. They need to know about that back in March or April that something is different, something's not performing the way you thought it was, so that you can make adjustments back then. Not clear in October.

Tim Barnes: 20:27

So that's good. Take some time to look at past performance as you put your plan together. A fourth key principle, I think, is commit to building margin in your budget. Yes, I see so many especially again, I'm speaking to those who are smaller nonprofits I see so many of them run so tight and so close to the edge. As you think about putting budgets together, make sure you have some contingency planning in that. So where's your margin? Don't budget too tight. Look for opportunities. And it's easy to say, oh, we'll just raise that extra money. We'll just, yeah, we're gonna maybe be a little bit of a deficit. We'll just, we'll find that money sometime during the year. We'll figure it out. Yeah, and that's not always a good plan, we'll figure it out.

Nathan Ruby: 21:24

Yeah.

Tim Barnes: 21:25

Yeah, but I think and part of it is that we're gonna talk about this in the last point but I think you wanna have enough flexibility in your budget. It's kind of like the flexibility you put into a building in an earthquake zone that it's able to move with what's happening around it. It can give enough. And that's kind of the way that we wanna be able to have a budget that's able to respond to the earthquakes that come along, both good and bad. But, nathan, you responded strongly to that and I can see that.

Nathan Ruby: 21:59

Yeah, and a lot of newer executive directors and actually some board members. You know the word nonprofit is defined as we don't make profit, so we're supposed to spend everything we make every year. Now that's a value, that's a philosophy, that is certainly a potential philosophy and there's nothing wrong with that. But the term nonprofit actually means it's an IRS code and it means that a nonprofit organization does not pay taxes on net revenue because it's retained in the organization to continue to benefit a purpose or a group of people. So when there's a profit, a net revenue, in a year, it doesn't get distributed to owners or stakeholder or share owners. That's what it means. It does not mean that a nonprofit organization can't have net revenue in a particular year. So if your expenses are 100,000 and you have 110,000 in revenue, that 10,000 is just retained. It goes into either savings or it's spent on more programs. You don't pay tax on that and I think that is a again, it's a philosophy that the board can have, that if we have $100,000 of expenses and we have $110,000 of revenue, we are gonna spend that extra 10,000 in programs right away. That is not my philosophy. I think having a margin built for an organization makes budgeting and actually makes an organization stronger. I consulted with an organization once a few years ago and, tim, they had an entire year's worth of operational expenses in a long-term savings program. So basically they could go a year without generating a single dollar and they could pay all of their staff and all of their bills for the year. And what a comfort that was, and it allowed them to step out and do amazing things that they would have never been able to try because they had the safety net. So build margin, in my opinion, tim, build margin into your plan. Build some contingency. If your budget, if your expenses for the year are gonna be 52,500, don't set 52,500 as your fundraising goal. Go, generate a little bit of margin in there. It'll make your life so much easier.

Tim Barnes: 24:49

Yeah, and I would agree, and you need to decide what's right for your organization as a board. You need to decide how much money do we have in our account. How many months should we be able to cover if all the giving stop today? How long you know? Is it three months, is it six months? Is it a year? You need to set that up. But the key point here is is you look at your budget as you think about that, make sure you have contingency built in so you have some margin to respond and be able to act when you have situations or unexpected things coming your way. The last point is prepare to do your budget in quote, unquote, in pencil, and I just I don't know if everybody's in the same space as I am, but I am very strongly committed to the concept that our budget is a guide. It's our best guess, in some ways, at what will come in and what will go out, and it connects to the mission and vision and our goals and objectives that we have. But I do it in pencil, not so that I can skirt around things, but so that I am able to respond to what goes on in life in general. Take it seriously, work hard. Do your best job at guessing and putting together what you believe this budget should look like as you go forward. But remember it's in pencil Maybe we might say in wet cement or something and the reason that it's in pencil, for example, is that if not everything comes in that I thought was going to come in, I adjust. If I have more come in than I expected, I can adjust. It's our guide for how we're going to move forward. That doesn't mean we don't spend what we don't have. We can't say, well, I'm going to take my pencil, I'm just going to, I'm going to spend more money even though we don't have money coming in. That's not what we're saying. But you need to be able to respond to what goes on. You're able to respond to circumstances, like most of us went through a few years ago, where you have a global concern, you have a pandemic or you have Even if we're wrestling now we have conflict going on in some key countries around the world. How does that impact? You need to be able to respond. We had, I think, back the last year, just as an example, when we put our budget together in 2022, ukraine was not in our, was not in our sights. That's not something that we put in, budgeted for that something was going to happen in Ukraine and that we were going to respond to it. But Ukraine did happen. There were, in our case, millions of refugees, people who left that country, who crossed borders. It was an issue that became into our sights For us. We had a number of people who got excited about that and said we need to help, we need to do something, and they put their resources there. Our budget changed immensely because we had resources. We had expected, we had a situation we needed to respond to, and it worked out. I could have said, well, I'm sorry that's not in our budget, no, but I used a pencil and I said we have resources, we have a need, so let's figure out how to put it into our budget, and it worked really well. You need to be ready to be able to respond to that.

Nathan Ruby: 28:47

Yeah, tim, that's a great example. Another example a few years ago, in a small community really close to where Tim and I live, they had a massively devastating tornado come through. It was hundreds and hundreds of homes were just wiped out for that community, for the nonprofits in that community. That can work from a budget perspective. That can work in your favor or against you. When that tornado went through, if your organization was feeding hungry people, I'd imagine your budget probably went up because the demand went up and people from all around the area, all around the state, were giving and they received state and federal dollars. My guess that was probably those budgets probably went up and their programs expanded during that time. What would be the other side of that? Let's say the county historical society or a local historical society? My guess their budget probably went down because people had other giving priorities. Maybe some of their regular annual giving probably decreased during that time, sometimes out of no fault of your own. Situations you can't control. You've got to change that budget. I've really have gotten better at this over the years of making changes faster. If I see a revenue trend where we're not going to be where we thought we were going to be, I am pulling back way, way faster than I ever had before. Yeah, it impacts people and, yes, there's no question. Our job as executive directors and as nonprofit leaders is to at least break even at the end of the year, or, if not, a little bit of net revenue, like we talked about earlier. Those are decisions that we have to make and that's all part of the budget process.

Tim Barnes: 31:04

Pencil yes, concrete no Pen no, well, that's exactly right, nathan. I will also put another plug here for looking at historical data around my Ukraine example. As I went into 2023, I needed to see that blip in 2022 where more revenue came in, because it was responding to that. As I went to 2023 to do the budget, I realized that bump was probably not going to be there, and so I needed to take that into consideration as we put that budget in for that year.

Nathan Ruby: 31:41

Yeah, absolutely. That's a great point. We have the organization I lead. Our operations are in Haiti, and Haiti sits on a massive fault line and is also located in what we affectionately call Hurricane Alley, constantly having massive issues from earthquakes and hurricanes. You could go back and look at our revenue in the past 15 years no, nothing else. But you know when we had an earthquake? Well, obviously, 2010,. And then hurricanes, because we have spikes in revenue. You have to be really careful of that, because those one-offs you can't budget for that. Yeah, you got to be careful. That's both on the expense side and the revenue side, both.

Tim Barnes: 32:41

The point is we need to be ready to respond to unforeseen things that might impact our organization, and not just global things. It could be changes in the local community. A business pulls out of town or goes bust, you may have staff, some of your staff may leave, may get transferred or get another job, or all kinds of things that can happen not only globally, but also very locally as well. The idea is building flexibility into your budget to be able to respond to those things. Those are just five things to keep in mind as you begin to prepare your budget. But the bottom line is this budgeting is one of the most important tasks that is required of an executive director, in cooperation, of course, with their board, and though it may feel overwhelming and make, as Nathan said, give you headaches as you think about budgets, it doesn't have to be. The process simply requires doing some pre-work considering your plan for the upcoming year, having conversations with key stakeholders, taking the time to gather previous organizational financial data and information, committing to not make the budget too tight and making sure to include some flexibility in the overall budget. Doing some pre-thought pre-work will help make a better budget process.

Nathan Ruby: 34:18

Thank you for listening today. If you are benefiting from what's being shared on this podcast, could you do Tim and I a favor and send us a review of the podcast on whatever platform that you're listening to? That really, really helps us with the algorithms and getting our message out to even more people, and just yo let us know how the podcast is benefiting you. If you would like to get in touch with us, our contact information can be found in the show notes. That's all for today. Until next time.