Mastering the Art of Budgeting for Non-Profit Organizations - part 2

Announcer: 0:04

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: 0:27

Welcome to Episode 112 of the Practice of Non-Profit Leadership. I'm Tim Barnes and I'm Nathan Ruby. Well, today is part two of our discussion around budgeting for nonprofits. Something that organizations focus on is they near a new year.

Nathan Ruby: 0:47

That's right, tim, and it might be a good point to put out. Point out, though, that your fiscal year doesn't necessarily have to be a calendar year. Maybe your fiscal year starts April 1st and finishes March 31st or, like the federal government, runs from October 1st to September 30th. Now, me personally, I am a big proponent of using the calendar year as your fiscal year, because, well, that's probably the fundraiser coming out in me, but we'll leave that for another episode, tim.

Tim Barnes: 1:21

Well, that's a good point, Nathan, and I have to be honest, I lean that way as well, but I'm sure there are others maybe who would have some good reasons not to be on a calendar year. But anyway, as you say for another time, on our last episode, though, we focused on some key points to keep in mind when we begin to prepare our budget More about the approach and the focus, and if you haven't listened yet to that episode, we would encourage you to give it a listen. I think it has some really helpful things for you as you begin to put your budget together as episode 111. But today we're going to talk specifically about the revenue side of the budget and then the expense side of the budget, looking at some key actions that we believe it would be good to take.

Nathan Ruby: 2:12

For a lot of people and actually I fall in this category as well is a lot of people just aren't really strong in this area, and so if you feel like you're stuck and you just you don't know what to do or you can't, you can't get it finished, we are always open to dialogue with you. Send an email, give us a phone call Our contact information is always in the show notes for all of our episodes and just reach out to us and we would love that we could sit down and have a conversation with you. And you know Tim's way smarter on this stuff than I am, and you know, and we're not perfect. We make our own mistakes. But maybe we could just walk you through and talk you through some things and just want you to know we would be happy to do that. All you got to do is reach out to us. All right, tim, are we ready? Should we get at it?

Tim Barnes: 3:05

Yeah, I think we also probably need to say our lawyers haven't said this, but we're going to say it anyway. We're not accountants, believe it or not. We're just two guys who've been at this for quite a while and so we're happy to share out of our experience. That's kind of what we're doing and I think it bears out too if you look around and look at things on budgeting. But all right, let's dive into this. Here's the first point. We're going to start with revenue and that is the first point. Let's start with revenue. Most people and Nathan, I don't know, this is probably what you've experienced, but I find that when it comes to budgeting, most executive directors, most finance teams, want to start and go right to expenses, and I think maybe that's backwards in some ways. I think you need to figure out what do we have to work with first and again, one of our points last episode was start with a plan. So start by what's the plan, what's the opportunities, what are you looking at? Now? Let's start with revenue, and what do we have to work out towards that plan? So if we need to come back and adjust this after working on expenses, that's fine, but I think it's really important to start with, where are we and what do we have to?

Nathan Ruby: 4:29

work with yeah and Tim. If you've been running an organization for a while and whatever your revenue generating looks like, whatever your fundraising looks like, you could have multiple strategies and a whole list of tactics and have a really fully developed, mature development program, fundraising program, or you could just be doing it by the seat of your pants or somewhere in between. If you've got three, four years worth of data, three, four years worth of revenue numbers, then your starting point is you're probably going to generate that same amount again. Doing what you did last year will generate about that same amount of money over. If you've been doing it for three or four years, Increasing 3%, 4%, 5% that takes some specific action steps and it takes additional things than what you did last year. So if you're on the expense side and you're coming in and saying, oh, we're going to add this program and it adds on a $100,000 budget, you're adding $15,000 to the budget, well, you better have it figured out ahead of time where that's coming from. So I've seen so many times where executive directors get themselves in trouble, where they just don't address it. They don't even think about the revenue side until they've already got the expense side done and then it's like well, now, what are we going to do?

Tim Barnes: 6:02

Yeah Well, you and I are the same page on that. It's a lot of that bears out of our experience, in our experience and also experience of others. So start with the revenue and we mentioned this again last week. But when it comes to revenue, start by evaluating and then forecasting from your revenue sources. So it's important to look at what are the past revenue? What's the past revenue performance? So what's come in in the past? What are your sources, whether that's grants or foundations or your fundraisers or other income? It's important to identify what those sources are and to spend some time looking at your past performance Under the historical trends. When does money come in during the year? Where does that come from? What are the market conditions? I think there's a lot of that conversation going on right now, nathan, when it comes to some of the things that I've seen. Is it actually giving to nonprofits Is actually down a bit. Is that gonna change in the next year and how are you gonna take that into consideration as you're working on your budget?

Nathan Ruby: 7:20

Yeah, and overall revenue is soft going into the giving season, giving into year end. Here it does depend which segment, which sector of nonprofit world that you're in, whether you're individual specific sector is up or down. But, yeah, you've gotta pay attention to those things. We don't have a what's it called a crystal ball. We can't look out six, eight, 10, 12 months and know what's gonna happen. But as things present themselves you've gotta be paying attention to that and saying, okay, how is that going to impact my donors in my community and the donors that are supporting my organization? And those are questions you have to ask yourself when you're budgeting. But it's also a question you have to ask yourself throughout the year as you're going through the year.

Tim Barnes: 8:14

I don't know if you talk to some of the people in my organization, they would say and I say this just as a matter of conversation, but they would probably tell you that I have a bit of a knack for coming pretty close to what our revenue projections are each year. And I would say I'm not a genius I flunked math when I was in high school and numbers are not my thing per se but I feel like taking the time to really look at history and trends and being informed is really important and I always budget fairly conservatively, so I'm not extravagant but taking the time to do the work ahead of time is really, really important. So I encourage you to spend some time looking at your management reports, looking at revenue from the past, all those kind of things, as you begin to look at what you think this next fiscal year is gonna bring. And I've already said this a little bit, but again how important it is to really look at your various revenue sources. So obviously, you're always gonna have donors. You have major donors, you have maybe consistent donors, you have foundations and the question is are you gonna get a gift from a foundation this year? Is that? Maybe you got one last year. Are you gonna get it again this year? But having some of those kind of conversations, mr Nathan, are you gonna have a fundraiser and how do you think that's gonna go this year? Do I need to put that into the formula as well? So where's the income coming from? And taking into consideration your best guess on that, and then I think out of that and you're a good one to reply to this, but out of that, then you need to set realistic fundraising goals. So how are we gonna get to that revenue? So you determine the amount of funds needed to support the organization's programs and initiatives for the fiscal year, but you need to have the plan for how you're gonna get there.

Nathan Ruby: 10:26

Yeah, and we've talked about that. I don't remember off the top of my head, tim, what episode number that was, but we've talked about how to set up a fundraising plan and probably after the first of the year that probably topic will come back up again and we'll cover it again. But fundraising revenue generating is all about personal relationships and building deeper and deeper relationships with the people who love you and care about what you do, Whether it's direct mail or major gifts, one-on-one, or whether you are do have grants that are coming in, even grants, and most grants for most smaller organizations typically tend to be government grants, state grants. But I'll tell you what I have talked to this year three different organizations and one especially where they got a phone call that said, hey, we're sorry, but that grant that they had an entire program that was dependent on that one grant. Yeah, I know that it's three years, but sorry, it's done and they had two years to go and they scrambling to they didn't wanna cut staff they didn't want, and obviously the people that were benefiting it was a children's program, so the kids that were benefiting from that. That threw a lot of turmoil in there and now nobody was expecting that state grant to get cut, and not always can you have conversations with those funders. But as a rule, as best you can when you're working on these budgets, if you have funding that is a major percentage of either your overall revenue or major percentage of a program, as best you can have conversations and say, hey, how does it look for next year? And that should be part of this process, if you have the time to be able to put towards that.

Tim Barnes: 12:33

I think as you get closer to a number here on the revenue side, you also should be thinking about developing a timeline and milestones that connected that revenue. So do you know when your deadlines are for the grant applications? Do you know when your donor outreach is gonna take place, your fundraising events? Out of this discussion, there should be action on the other side of this as well, and so, as you go through this process, before you talk about expenses, there should be a number. So, for argument's sake, let's say you come out of this saying we believe the best of our ability, with some flexibility, we believe we can. We're gonna have revenue of $500,000 for this year. Small organization, okay, 500,000. So then we have a number that we can begin to work on the expense side. So start with revenue and then, once you get the expenses, we'll come back. We'll talk about that in a second. But let's start with what the number is that we think we're gonna have. Well, okay, so we have our revenue number, and so let's then talk about expenses, which I know all of you are excited to talk about how we're gonna spend all that money. We just came up with A few things when it comes to expenses. I think the first thing and it sounds like we're talking about this ad nauseam but review and analyze your past expenses. You gotta do the pre-work. So look at your spending patterns last year, look at your spending patterns over the last few years. You know where is your money going and when is it going and how is it going. So, again, get into your reports, get into your data and look and begin to analyze those past expenses. I would encourage you look at year over year, how are the expenses going? And even look at five years. What have been the pattern when it comes to expenses? And it's important, as you analyze this, to ask the question what expenses from last year will we not have this year that we don't need this year? So, for example, maybe last year there was some infrastructure that you focused on. Maybe you got new computers, maybe everybody got a new computer or a new software system. Or maybe you did some remodeling on your office. Maybe there was programs that you had that you're not gonna do this year. Event maybe you had a big event last year that you're not gonna do the event. Maybe a golf tournament last year and this year it's like no, we're not gonna do the golf tournament, looking at, from last year to this year, what's gonna change when it comes to expenses. So that's really important and to begin to identify some areas where maybe there's an adjustment or cost reduction that need to be made. I know you're all like, hey, I wanna add programs, I wanna add this, but let's start with where are we? What are we at year over year as we look at the upcoming financial year? So take some time to review and look at and analyze your past expenses. The second thing here and this comes out of our first episode you need to connect your expenses to the plan. What is the plan that you put together? What are the opportunities? What are the needs that you have? What are the challenges you're facing? Go back to the plan what are you gonna try to do in 2024? And so you need to allocate the resources based on the priorities of that plan. We would say, first of all, start with what are your fixed expenses? What are the expenses that are already there? So it could be, if you pay rent a rent on your office there's, you have utilities, you have some of those kinds of things. You have maybe some subscriptions, software subscriptions or something, but there's fixed costs there, especially within the admin area. What's it gonna take? Maybe you have your staffing, you have consultants that are a fixed expense because they're doing something for you, but get an idea of, okay, what's already fixed, what's already in our budget. So I think the second thing is to look at what are our current programs and our operational areas, what money needs to go to keep the programs going, and then you can begin to think about what are some new initiatives, what are some things that we wanna do, what's it gonna cost? Something we talked about last time, too, is to look at contingency. Where's the margin? Where am I gonna keep margin in our budget so that we have flexibility to respond? And so it's really important to allocate the resources based on the priorities of the plan of the organization, determine the budget allocation for each program or operational area based on their importance and the alignment with the organization's mission. You're not just kinda throwing this budget together, but it's coming out of who you are as an organization, the mission you have and what the focus is for the new year.

Nathan Ruby: 18:06

Tim, last week we were talking about spreadsheets and I told you that I was getting a headache talking about spreadsheets, and now I'm getting another headache because I'm thinking of the numbers in my own budget as you talk. That's going into that spreadsheet, which means another spreadsheet, which means another headache, Tim, and I kinda say that as a joke, but it's actually real. Spreadsheets do give me a headache, and we talked about this last week a little bit too. But this budget that you're putting together, and especially on the expense side, it talks about who you are as an organization. It talks about what you value, what is important to you and for the organization I lead. We have a pretty large. We have a very small US staff. It's very basic, very small, but we have a very large Haitian staff, and in Haiti, the unemployment rate where our programs are unemployment rate's about 80%, maybe creeping up a little bit higher in that. So there is no job to go. It's not like you can leave and go down the street for a better opportunity. There is none, and so salary adjustments increases for our Haitian staff. Maybe life and death is a little dramatic, but I don't think it's that far off of being accurate, and so that is one of the things. That's our first discussion is okay, what are we going to do with that? And for our calendar year, and so we've already started those discussions, and that depends on what's our November, December, what's our revenue the next 60 days, what's that going to be? And because everything, not everything else, but you know, that is a key priority for us to make decisions on, ultimately for our board to make decisions on, and everybody has that. Everybody organization has those things that are key to who they are as an organization and a lot of times, those are some of those discussions that you need to be having higher up on the discussion priority list.

Tim Barnes: 20:30

And I can't emphasize this enough that these budget discussions and decisions and putting this budget together is so much easier if you've taken the time to put the plan together, because it's in that putting the plan together that you identify what are your priorities, what are important is your plan and then eventually your budget aligned with your mission. And so often we start with the budget and then we go back and go okay. So I guess maybe we should have a plan, you know, to fit the budget and it doesn't have to be complicated. I know it can feel that way. If you're not a, if you're not a numbers person, it doesn't have to be complicated. It just needs to answer a few key questions about what's our mission, how are we carrying it out, what are our priorities in that? Now let's figure out how we take the resources we have and make sure that that plan is carried out. I don't know, maybe you might say well, easy for you to talk, but I don't think it has to be super complicated, especially as a smaller to medium size nonprofit.

Nathan Ruby: 21:45

Yeah, absolutely. And if you're new, if you're early in, if you're organization, if you're a founder and you're early in your organization, I would, I would default to simplicity over complexity for as long as you can. Now, you know, there's going to be, there's going to be some point where your auditor is going to say we need, you know, we need more complexity, we need more specificity. And when that time comes, that time comes, but don't feel like you have to have a you know, a four page budget and you don't. it could be pretty simple and you know we got. We being my, you know, my team, my finance team and I we inherited a budget and a financial system that was overly complex and now we're trying to simplify it. So so it don't. Yeah, I don't don't feel like you have to make it complex to make it accurate, because that's not true.

Tim Barnes: 22:52

I guess. Another point I'll just say and this probably could have gone last, last week as well, or last episode but if this is something you really struggle with, if this is like your first or second time going through the budget and doing that, ask for help. Maybe there's somebody on your board that has a financial background, maybe even a CPA, someone you know in the community who does this. There is no shame in asking for help to, to to walk through this and make sure you have another pair of eyes looking at. Eventually it'll come back to your board, but if you need help in this area, don't be afraid to ask for help.

Nathan Ruby: 23:31

Well, and especially in in projections, and, and you know you're projecting out 12 months, or you know if you're doing this. If you're, if you, let's say, your calendar year, and you're starting to think about next year's budget in September, well now you're September, october, november, december, 12 plus, or you're 16 months out on on some of these expenses, and so how do you forecast that? And I don't know. But you know, some things have rule of thumbs. There are some, there are some, there are some short, maybe shortcuts not the right word but there are some shortcuts that you know. People that have done this before and know what they're doing can help you with those things and make it just a little bit more accurate for you. So, yeah, great point, tim. Absolutely. If you just find help, whether it's local or whether it's us or whether it's somebody else, don't don't feel like you have to be an expert on this and oh, I'm the executive director, so I have to know how to do this. That's not true. That's not true at all.

Tim Barnes: 24:34

So here's a question for you, nathan as this budget comes together and we look at what our expenses are, look at the projects, look at the infrastructure, kind of get a total number of what we're going to spend and we get ready to put the budget out, do we just go okay, hey, here's $300,000 and so we're just going to divide it by 12 and that's our monthly budget. That's a monthly amount that we need every month. Is that the way you would go for it?

Nathan Ruby: 25:05

That'd be the easiest way to figure it out. I'm not sure it would be the most accurate way of doing it, so I would have to give an answer of no, tim. That's not how we would recommend doing it. Do not take your total budget amount and divide by 12 and call it good, because you probably will get yourself in trouble sometime throughout the year.

Tim Barnes: 25:28

Well, there's a little thing called cash flow when it comes to running an organization, and cash flow is really important to monitor and it's important to consider when you're putting your budget together, because our expenses don't often go that easily. Where it's the same amount every month and you especially, nathan, you have a good example of this in your organization you have a huge expense early in the year that you need to be planning for that. You can't just divide it into 12, right?

Nathan Ruby: 26:01

Yeah, we have an expense that comes in January every year. That's about 15 to 18% of our budget and it comes due like January 12, 13, 14. So it's in the next year's budget. So we're planning on the 24 budget and it's going to show in the 24 budget but we are accounting for I'm not going to say accounting because that would give the wrong impression In our cash flow projections. We are referencing it in December cash flow because if we don't have that money by December 31, probably we're not going to raise enough money from January 1 to January 13 to pay $130,000 bill. We better have it on December 31. So we are looking at it and we are planning for it and we are talking about it now and we're talking to donors about it and the impact that that makes. So we've got to be accounting for it, talking about it now, not waiting to. Oh well, that's next year's budget, so I don't have to worry about it.

Tim Barnes: 27:23

So when you're thinking about when you're going to spend money, you need to think about when that actually is going to happen. So if you have an event that takes place, let's say, in September, well, you need to make sure you have the cash flowing in to be able to actually take care of the expenses in September or August if you needed to do so before then. The key point is you need to not only know how much you're going to spend, but you also need to consider when you're going to spend and how that impacts your total budget, something that oftentimes people miss on that. So cash flow is key, important to keep an eye on how your cash flow rolls through. You've done the work, you've looked at the history, you've begun to get some numbers, you've looked at your priorities, the plan, and you know how much you think you need to spend for this year. The fourth thing, then, is you need to begin to reconcile the revenue and the expenses. So you need to be realistic. If you say, hey, our revenue projection was 500,000, but our expenses are 750,000, you got a problem. So the question is how am I going to reconcile that? What am I going to do with those two numbers? You need to be. First of all, you need to be realistic. The answer is not we just need to raise more money. Maybe you do, but that's not your first answer. We just need to raise more money. You need to really be realistic about how much money can you raise. You said you could raise 500,000. So all at once, now you have 250,000 more you've got to go for. So how does that fit in there? So you need to be realistic. If there is a shortfall, then you need to begin to ask the question what actions do we need to take? Do we need to cut? Do we need to find another revenue source? What do we need to do to get those together? In some cases, nathan, you can push back on this if you so desire. In some cases, maybe you say you know what. This is really important program. We actually have X amount of dollars in our rainy day fund. Then we're going to move over for that, and that can be a good option. The key is, you can only use that option if the money is there. But, once you use it, you are not going to be able to use it again until you bring that back up. But again back to your plan and your priorities and your mission. Maybe that's the action you need to take, but you need to be very clear about why you would take that kind of an action and I think those conversations are so hard, Tim, especially in our world of nonprofit.

Nathan Ruby: 30:18

Most of my vast majority of my life has been on the nonprofit side. I have spent some time on the for-profit side and you know nobody for-profit or nonprofit nobody likes to cut programs, cut business units, cut people. Nobody likes to do that. But it seems in when I've experienced that on the for-profit side there is less of a bad feeling about it. And on this nonprofit side there is this general feeling understanding that we just we don't want to cut people, right, we don't want to cut staff, we don't want to cut program back, because we have real human beings that are counting on us to do this work and to deliver this output and nobody wants to cut that. I don't want to cut that. That said, if you have a gap in your budget as you're planning the budget or during the year, if some of your revenue is not coming in as you expected and you're starting to see a gap, you have to have difficult conversations, and one of the exercises that we do that I've done with my finance team is I haven't said okay, well, what are we going to do if we have to do this? You know, blah, blah, blah. I give them a number and say, okay, this is your new number, Now recalculate, redo it to this number, and then you are forced to. Okay, I don't want to do it, but we're going to have to cut three people, we're going to have to do this, we're going to have to do this, we're going to have to do this, and then we prioritize. All right, this is the first thing I'm going to do, this is the second thing I'm going to do. This is the third thing I'm going to do, and hopefully it won't come to that, but at least at least I have a plan. And doing that planning out in advance to him is it's so much more productive than all of a sudden it's like oh my gosh, we can't make payroll in three weeks, we have to do something right now. Then you end up making bad decisions that will really harm the organization or could harm the organization. So you got to get way out in front and have these conversations early in the process.

Tim Barnes: 32:38

Well, and I think we talked about in our last episode the idea of doing the budget in pencil, in the sense that you're making your best guess for the information that are in front of, in front of you right now. You're putting in some ideas for margin, some contingency, so that you can move according to what happens and you may need to make some adjustments. And, especially in the initial process here you need to reconcile your revenue with your expenses, again connected to the mission and vision and priorities of your organization. So, taking the time to do the pre-work, to do the plan and then to discern to the best variability how much revenue is going to come in and then how are we going to live and fulfill our mission in this coming year, and kind of reconcile those two things are really important. It's not easy, it doesn't have to be complex, but if you need help, reach out and ask for that. So let me just give you a final word. The final word is this After this budget is put together, you've done the hard work you just need to remember that monitoring your budget is an important task let's not set it and forget it kind of task. So you need to plan ahead in your budget. You need to plan ahead, to look and set up benchmarks that you're going to use to monitor the budget, what you'll decide, what you will use to judge whether you're on track or not, and schedule those financial reviews, whether that's with your board, whether that's with your leadership team. But make sure that you are paying attention on a regular basis and that you have taken the time to set up benchmarks and markers that allow you to make decisions about that. Schedule those financial reviews to be ready to make adjustments as needed, both on the revenue and the expense side, as you go forward.

Nathan Ruby: 34:47

Thank you for listening today. If you are benefiting from what is being shared on this podcast, could you do Tim and I a favor and leave us a review? On whatever platform you're listening to, it really helps us with the algorithms and gets our podcast out to even more people. Just let us know how it's benefiting you. And don't forget if you need some extra help on budgeting, or if you're stuck and you just need another opinion, reach out to us. Tim and I would be happy to have a conversation with 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.