By: Ryan Adams, Manager, CPA
The process of creating not-for-profit (NFP) budgets can be overwhelming. One can argue that the NFP’s budget can be even more challenging to prepare than a budget for a business enterprise. The NFP may provide goods and services in addition to receiving donations with or without restrictions or conditions, government and foundation grants, earnings from investments, and fundraising events and campaigns which again may have restrictions on how the funds are used. The time and effort involved in preparing a reliable budget is significant.
However, to make the budgeting process a little easier, consider the following helpful strategies for developing key budget assumptions.
Many NFPs provide goods and services that are similar to a business enterprise such as admission fees, service fees, membership fees, or school tuition. The underlying assumptions for these sources of revenue are usually the same no matter if the entity is a business enterprise or NFP. Generally, prior year actual results adjusted for any significant changes provide a reasonable basis for forecasting these business-type revenues. Similarly, expenses can be forecasted using prior year actual results adjusted for any significant changes. Special consideration should be given to expenses that are not predictable using prior year actual results alone. For example, employee compensation will fluctuate with the size of the NFP’s workforce as compensation expense is mostly a product of the number of employees and average compensation per employee. For new revenue sources, NFPs can look to the results of similar organizations on a reasonable basis.
Donations from Individuals, Businesses, Foundations, and Churches
The level of complication associated with developing key assumptions for contributions is largely dependent on the age of the NFP and the establishment of a devoted donor base. Management of an established NFP can access their donor database and reasonably assess the likelihood that significant contributors will continue to support their NFP and whether the amounts will change from prior years. For newer NFPs without established donors, management could forecast contributions based on the expected level of effort during key giving events throughout the year adjusted to reflect an amount that newer NFPs can reasonably anticipate receiving based on other similar new NFPs.
Equally important is both the anticipation of restricted revenues and the utilization of those revenues in the manner that is most useful to achieving the NFP’s objectives and tax-exempt mission. Often restricted revenues can be utilized efficiently in a manner that relieves pressure on non-restricted funds. NFPs typically maintain an awareness of this in their operations, but not always when developing the budget. This factor can help an NFP expand its impact on the community.
For NFP budgets initially showing a deficit, it is tempting to plug an additional amount under contributions in order to “balance the budget”. However, this practice should be avoided unless management has a plan in place to increase efforts to meet the higher goal.
Contributions from recurring fundraising events may best be forecasted using prior experience adjusted for any significant changes. For new fundraising events, management should consider reaching out to other NFPs in the community to exchange ideas and develop expectations about the likely community response to the new fundraising event.
If the NFP has a good relationship and history with a granting organization, then grant revenue can be reasonably forecasted using prior experience adjusted for any changes in the level of services under the grant program expected during the budget period. However, the NFP may look to other grant opportunities for new sources of support. The NFP can reasonably develop an expectation based on knowledge of the grantor, its funding strategy, and the success of other similar NFPs in applying for grants.
If you have any questions as you prepare your 2023 budget, please contact a Blue & Co. advisor.