While understanding budgeting is an animal all of its own, understanding the difference between for-profit and nonprofit budgeting is imperative to nonprofit organizations. There are fundamental differences between the two that must be understood, in order to successfully implement and work a budget plan. Things like Board Involvement, Grant Management, and even Bottom Line create the need for nonprofits and for-profit budgeting to differ. Let’s take a look at some of those differences.
For-profit budgets are driven by profitability – a business’s definition of success is hitting (or beating) revenue targets.
In the nonprofit world, accountants must first project expenses. How much money will it take to provide these mission services or conduct these mission activities? Success is measured in programmatic impact, not money generated.
And, the dissimilarities between for-profit and nonprofit budgeting don’t stop at the fundamentals. Nonprofit accountants function in an extremely complex environment, and have lots of eyes on and hands in their budgeting process and outcomes.
Here’s a look at some other idiosyncrasies of nonprofit budgeting, and how best to manage them.
Volunteer Board Involvement
Nonprofit boards are heavily involved in the budget process – providing budget direction, up front; final approval once it’s drafted; and checks and balances throughout the fiscal year. You may be thinking, “Well, so does a BOD at a for-profit organization.” True, however commercial board members generally know and understand the inner workings of a budget and the process it takes to build one, having likely undergone the exercise many times at their own workplaces.
Conversely, you may have community members serving on your board who have a strong passion for your mission, but very little knowledge about budgeting and financial planning. This puts the onus on you to very clearly communicate what mission productivity and organizational growth and sustainability look like, and how to support them financially.
Break-Even vs. Surplus Budget
In the for-profit world, the more revenue you generate the better! Not-so-much in the nonprofit universe, where break-even budgets have traditionally been the norm.
For some, it’s a philosophical discussion. However, it’s more of a practical matter for most nonprofits (particularly smaller ones) that barely raise enough money to fund their missions, let alone have surplus funds lying around. For these nonprofits, a break-even budget means they’re stretching every dollar just enough to meet all of their mission obligations.
Some nonprofit leaders may be reluctant to show a surplus in their books, fearing the perception from donors that all their resources aren’t being put to good use, and they’re not being noble stewards of donated funds.
But, there’s a place in the nonprofit universe for surplus budgets, too, for example, if you need to increase reserves to cover big foreseeable expenses or pay down debt. In this case, you should build your budget by establishing realistic income targets that outpace your projected expenses. And, if you tell the story right, your donor community will appreciate that you’re handling their funds well, managing a financially stable organization.
Compliance with Grants and Contracts
Grants and contracts are often break-even contracts, and require nonprofits to show proof that they’re spending exactly what they were given. Budgeters need to work closely with the development office to know what strings are attached to what funding sources, and strictly adhere to those stipulations.
You should also be aware during the budget process of what resources are restricted, meaning they’re constrained to a particular purpose. Create an unrestricted operating budget first with funds considered usable for any purpose, then “add in” restricted dollars and their related expenses.
Many nonprofits use off-the-shelf bookkeeping software as their primary budgeting system. However, building and compiling budgets using spreadsheets can be cumbersome and time-consuming.
As you grow and your funding sources diversify, you may need a more advanced budgeting system that automates the process by building budget worksheets based on any program, fund, grant, department, cost center or any other designation, and integrates with your fund accounting system.
Ongoing Budget Review
A monthly or quarterly review of actuals versus projections will help you stay on top of any variances. It’s tremendously valuable to have an accounting system that helps you do so by proactively monitoring your budget and automatically alerting you when pre-determined variances have been exceeded.
Here at RBP Methods we specialize in helping nonprofits to reach their financial and missional goals. Providing software, service, training and support to maximize your effectiveness. If you are struggling with nonprofit budgeting or in need of technology that will help you reach your goals, contact us today.