Building a better budget (even if you are allergic to numbers)
During an interview with staff members at the New York Council of Nonprofits, Jenny Chandler, Vice President at the National Council of Nonprofits, learned how to build a better budget:
In an effort to get over my allergy to numbers, I spoke with the terrific team of Kelly Mathews (Chief Operating Officer), Michelle Jarvais (Chief Fiscal Officer), and Elizabeth Mathews (Senior Accountant), who shared with me their “6 P’s” approach to nonprofit budgets. See if you can find the “P’s” in their advice!
Jenny: When you work with nonprofits to build a “better” budget, what are your goals?
Michelle: We’re going for a strategic process that helps you plan – not just taking last year’s numbers and updating them. We encourage nonprofits to look a few years ahead and take a multi-year approach because that will result in a better budget.
Kelly: In my work with nonprofits I often see folks not thinking through the long-term effects of short-term decisions. An example would be a simple cost-of-living adjustment. It’s great in the year it’s given – it bumps up salaries and boosts morale. But has the nonprofit projected out the impact of that adjustment for the next few years? It’s going to change the revenue requirements for many years to come. That could be huge.
Michelle: We encourage nonprofits to think of their budget as a living, breathing, guiding document. Your budget is not something that’s approved by the Board of Directors and then locked in stone for the rest of the year. It’s never going to be static. It’s going to change month-to-month. It’s normal for the actual numbers to turn out differently than you projected when you drafted the budget, so a “better budget” is one that changes with the nonprofit’s experience.
Jenny: It sounds as if you are suggesting that the board-approved budget should be formally amended throughout the year?
Michelle: Perhaps. Many organizations approve at least one budget revision annually. But sometimes adjustments are anticipated and reflected in the budget narrative so that a formal amendment isn’t necessary. If the narrative is thoughtfully drafted it will explain potential variances and alert the board to alternate scenarios.
Jenny: Wait a minute. You just said, “narrative” – You mean budgets aren’t just numbers on an Excel spreadsheet?
Michelle: No! A budget acts like a narrative when it tells the nonprofit’s story through the numbers. But it’s also useful to add short narrative explanations for various entries so that those reviewing the budget-: -- program staff, the finance committee, and board members – are aware of the underlying rationale for the numbers, or alerted to the reasons why a number in this year’s proposed budget is different from last year’s, for instance.
Jenny: You just mentioned some “P’s” – People who help build and approve the budget. Program staff? What’s their involvement?
Elizabeth: Program staff are the folks who will know the expenses of their programs and will have a wish-list of expenditures that they’d like to include in the budget planning process. It’s helpful to interview them during budget planning time and make them aware that some of the overhead costs for the entire operations (rent, insurance, utilities, internet etc.) will be allocated to their program budget. We need to help all staff understand the full costs of delivering services, which is more than just direct program expenses. In the budget we refer to those indirect and administrative costs as “shared costs,” which fosters the sense that we’re all in this together. We don’t want those shared costs to be covered up or overlooked when the fundraising staff are writing proposals for grants. We need to know our full costs and embrace them, and accurately reflect them in the budget for each program. That’s being transparent, and it’s also building a better budget.
Jenny: What are the biggest myths about budgets?
Kelly: That they are static, and that they are for one-year only. Better budgets are flexible as Michelle explained, and they are also forward looking and multi-year, so they can accurately reflect not only multi-year funding sources, but also projects that extend beyond one fiscal year. Also, if you start from scratch (we call this a “zero-based budget”), you can think about what you really need to make a program or activity successful. What would it cost if you built it from the ground up? Don’t be bound by last year’s budget.
Jenny: What’s an unexpected speed bump for budget builders?
Michelle: Politics. You can’t avoid it. Staff may try to out-hustle each other to secure a greater slice of the budget pie. Office politics play a role in budgets!
Jenny: What do you like best when building a budget?
Elizabeth: It’s a process that keeps everyone in the loop. An example is office supplies. The office manager puts in the supply order. If s/he is aware of how the budget is a guiding document for supplies throughout the year, s/he can monitor the expenditures and push back if someone is requesting supplies that won’t be approved. S/he can help out the rest of the team by being proactive.
Jenny: Is building a budget an art, or a science?
Michelle: Both. It’s a science because you need to rely on a process and policies that tell you who approved the budget and how it’s developed… But it’s an art because you are making projections about the future that are unknown. So you try to be creative in thinking of all the “what if’s” and plan for alternate scenarios for cash-flow or revenue sources. It all ties together – the planning, the process, the policies, the people, the politics, and in the end – the product. A better budget.
You too can learn to build a better budget guided by the finance folks at the New York Council of Nonprofits by attending a webinar on July 23 at 11 am Eastern. Discounted registration is available if you are a member of a State Association that is member of the National Council of Nonprofits.
Changing the Culture on Costs, One Community at a Time
Most nonprofits know the problems caused when governments, funders, and the public incorrectly assume that only program costs are well spent and that overhead costs are undesirable. Some nonprofit leaders in Napa Valley, California are doing something about those attitudes, and providing inspiration for the rest of the nonprofit community...
The Napa Valley Coalition of Nonprofit Agencies recently created an Advocacy Education Committee that is dedicated to two primary goals. First, the committee seeks to promote the sustainability and growth of the nonprofit sector by providing its membership with tools and education to effectively advocate for their mission and clients. Second, the group is educating the community at large about the value of nonprofits. Core to both goals is helping people understand what overhead is and why it is so important for maintaining a vital and effective nonprofit sector.
Sara Cakebread, Co-Chair of the Committee, put it succinctly: “What we’re trying to do is to create a whole program that educates the public: What is overhead, why it is important and why we need to support our nonprofits, if we want them to thrive.” Toward this end, Committee member Becky Peterson reframes how nonprofits should be viewed, “[They] do good work in our community, often filling the gap that government or the private sector doesn’t fill… we need to think about nonprofits as service providers, not as charities.”
This subtle, but important shift supports the growing understanding that to be effective and efficient nonprofits must invest in their infrastructures and a solid base from which to operate.
Cakebread said it well when she observed: “Donors say we want our money to go to programs, we don’t want to spend anything on overhead. As a donor you can’t do that — you can’t give somebody a lot of money and tell them they can’t pay for somebody to administer it. Or deposit the check. Or pay for an office or pay for utilities. All of those things people don’t think about.”
Jan Masaoka, CEO of CalNonprofits, calls The Napa Valley Coalition of Nonprofit Agencies “a great example of local nonprofits working together to get more funding to the communities they serve and represent, as well as working with county officials to streamline government processes."
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And now for something fun: A summer celebration of charitable nonprofits!
Sit back in your chair, let yourself relax for two minutes to enjoy this short “Motion Graphic” about how nonprofits are essential to the quality of life in our communities. Brought to you by our member State Association, the Nonprofit Association of the Midlands.
Resources to help your nonprofit develop a budget
Budget Best Practice Tips (NYCON)
Financial management resources (National Council of Nonprofits)
NYCON’s Budget and Cash Flow Toolkits: Comprehensive, step-by-step guided & easy to use ● Take a tour ● Information & Online Order Form ● Contact your state association of nonprofits to inquire about a discount.
Is Strategic Philanthropy Yesterday’s News? (Nonprofit Quarterly)
Build a board culture that advances fund development (Cause Planet)
Preventing fraud in the cash disbursement process (Tate & Tryon)
Author Interview: A Board Member’s Easier Than You Think Guide To Nonprofit Finances (Andy Robinson and Nancy Wasserman)
Beware of a current government grant scam.
Free program: Everything you always wanted to know about Grants.gov (June 25, 1 pm Eastern)