Rain or shine. Drought or deluge. Nonprofit organizations know how quickly the flow of donations can change. But a different approach to budgeting may help them better weather impending storms.
A surplus-based budgeting model can help nonprofit organizations better prepare for economic shifts, changes in donor giving or increased expenses, says Evan Walter, BOK Financial®, Institutional Wealth relationship manager. But most don't follow this model.
“Nonprofit is merely a tax status, not a business model.”- Dan Billingsley, chief strategy officer, Community Service Council, Tulsa
"Surplus-based budgeting is simply having money left over after expenses are met," he explained. "And it's a model more nonprofits would benefit from embracing."
Most nonprofits opt for zero-based budgeting where every dollar is allocated, because they want to look as though they are not holding back from their mission.
"Nonprofit is merely a tax status, not a business model," said Dan Billingsley, chief strategy officer at Community Service Council in Tulsa. "Many organizations shy away from surplus-based budgeting because they don't want to give the appearance of making a profit or not doing as much as they can with their funds. They need to recognize that donors don't see it that way, because most households and businesses use a surplus-based budget themselves."
Walter added that using a zero-based budget is not giving enough consideration to the stability or sustainability of revenue sources.
Having a surplus can carry a nonprofit through lean or challenging times—like a pandemic.
He said it's also a way to encourage growing at the right pace.
To build up that margin requires financial forecasting and a bit of analyzing what financials look like today, and what they will look like in three months and in six months. When it comes to forecasting, Walter suggests some key areas for review:
- Burn rate
- Fundraising calendar
- Cyclical nature of annual expenses and revenue streams
- Economic shifts that impact donor giving
"It's important to have a clear picture of what's coming in and what's going out," said Walter. "Know when fundraisers are planned, when large donors tend to give, when expenses tend to increase and when your services might be in higher demand. A financial forecast based on historical data and future plans are key to being able to budget and save in a different way."
To get started, Walter suggests nonprofits:
- Have a strong banking and financial services relationship.
- Ensure you have an actively engaged board that includes members with financial expertise.
- Put your finance or investment committee(s) to work.
"Strong finance committees are make or break for an organization," said Billingsley. "Above and beyond that, it's vital to have a strong financial and banking team in your corner."
Financial surplus means sustainability for a nonprofit organization, Walter said.
"It may be a different model, a different way of thinking for many nonprofits," he said. "But switching from a zero-based budget to a surplus-based budget is like a household pivoting from living paycheck to paycheck to being empowered to begin saving and making strategic financial moves."
Part 1: A financial handbook for nonprofits
Part 2: Tracking dollars and donors
Part 3: Nonprofits meet new generation of charitable givers