Common Budgeting Mistakes NOT to Make – And the Easy Solutions that Will Revolutionize Your Fundraising Results
One of the most difficult tasks an executive director undertakes is to get his or her nonprofit financially stable and grow. The task is especially hard during times of economic distress, when money is hard to come by and the need for services rises exponentially. To get your agency on a stable, even growth trajectory avoid the common budgeting pitfalls I see nonprofits make all the time.
Overestimating Potential Revenues
One of the most common mistakes I see in creating budget is overestimating potential revenues. Projected fundraising revenues should not based on any revenue deficit you are trying to fill. Don’t base them on what your team raised last year increased by an arbitrary percentage either. Nor should you base your projections on another organization’s fundraising results. Your revenue budget needs to be more customized to your particular nonprofit’s situation.
Instead, develop your fundraising goals accounting for your nonprofit’s organizational capacity, economic environment, and unique growth history. For example, do you have as much organizational capacity as you did last year? Are your volunteers burned out? Have there been layoff’s? Have costs been cut? Is the economy in your community better or worse? Are residents moving in or out of your area? Ask yourself these questions. Any or all of these situations impact how much money your team is able to raise.
It is good practice to always budget revenues lower than expected, in case something happens, and your team is not able to perform as well as expected. When you do come up with reasonable projected revenue, decrease them by 5 percent more. Leave room for results to be lower than anticipated. For a more detailed discussion about setting revenue goals, see my article How to Set Good Revenue Goals Amidst COVD-19.
Underestimating Future Costs
You underestimate revenues but overestimate costs. Expenses are easier to project than revenues because they are more constant. However, you want to project them higher than you expect so that you have money available if your bills come in higher than expected. Plus, it leaves a little extra room if revenues are lower than expected. To counteract the uncertainty, take what you think will be a normal increase in costs and add 5 percent more.
Measuring Gross Rather Than Net Income
It doesn’t matter how much gross income you raise, net income is what’s important. Net income is gross income minus costs. You can eat up all your gross income in costs, it you’re not careful. For example, I once worked with an agency that raised $1 million a year through their gala. They didn’t understand why, with such great results, they were losing money in their overall budget every year. An analysis of their costs revealed that although they were raising $1 million each year, it took than $1,25 million to raise it, meaning they lost a quarter million each year. Don’t let the big gross income number dazzle you. Always account for your costs. We talked in detail about net versus gross income in the article Measuring Overall Fundraising Performance.
Only Including Direct Expenses
And it’s not only direct expenses that count. It’s total costs that count. A good example of where nonprofits don’t account for total costs is in their fundraising endeavors, especially grants and special events. I often see grant budgets where there is no acknowledgment of the indirect costs incurred, so the nonprofit ends up spending more money on the program than it takes in. The agency ends up constantly losing money. Or special events. The average cost to raise a dollar through special events is 50 cents, not including labor. And special events are usually very labor-intensive. Run your numbers accounting for labor costs and see how much you really make. If you’re like most nonprofits, you actually lose money on your special events. Budget for total costs so that you are not making up for a constant loss. For more on measuring fundraising costs, see my article Measuring Your Fundraising Costs.
Failure to Compare Returns on Investment
Return on investment is calculated be dividing revenues by expenses. It tells you how hard your dollars are working for you, that is, how many dollars your agency can realize through each dollar you invest in that activity. Different activities yield better results than others. So many nonprofits are dependent on special events, not your greatest return on investment, especially when you account for total, not just direct, costs. Compare the returns on your investment for each fundraising activity you would like to implement. See which ones yield the highest financial returns and consider investing your dollars there. We talked about the usefulness of measuring return on investment in the article Optimizing Your Fundraising Resources.
Failure to Diversify Revenue Streams
When times are good, it is easy to rely on a steady stream of funding. Overreliance on one funding sources is not healthy. Your nonprofit is in the danger zone when 80 percent or more of your fundraising revenue comes from one source. And I mean that in terms of broad revenue channels as well as individual sources within each channel.
There are four broad ways to realize revenue: earned income, or fees for service or product; unearned income, usually interest and dividends on investments; fundraising, that is, donations, grants, and special events; and government contracts. Studies show that nonprofits with two or more general revenue channels are more stable than those with one.
You also need to look at the individual sources of funding within each channel. For example, if you rely on government contracts, are those contracts from more than one federal agency? Or if you rely on fundraising, are all your eggs in the grants basket? If so, you need to diversify your sources of funding so that if one revenue source dips, for whatever reason, it won’t devastate your organization.
Sometimes, nonprofits think they cannot budget for a surplus, that they should only raise as much money as they need for the budget year. You need to budget for a surplus though. It’s how your nonprofit grows. The only exception to this rule is that grant revenue and expense budgets need to show break-even income, including the donation you’re asking for, because you want to show that you need exactly the amount of money you’re requesting. Other than that, in your planning, budget to make a surplus. A healthy surplus is 3-6 percent of your operating budget.
Failure to Set Aside a Portion of Surplus Income
When you do realize a surplus, don’t just spend it. Build wealth as well as net income. Put one-third of your surplus away toward reserves for unexpected emergencies. Put one-third toward improving infrastructure that streamlines processes and procedures, saving time and money in the long term. And invest one-third in long-term appreciating assets so you have capital in case you need t=ever need to borrow. Build wealth as well as net income.
Wrapping It Up
Ensure that your nonprofit will start out ahead of the game and have the best chances for financial success. Avoid the most common pitfalls. When budgeting revenues, do so thoughtfully, accounting for your agency’s unique circumstances. And always budget 5 percent lower than expected revenues. You underestimate revenues but overestimate costs. And measure net, not gross, income. Include total, not only direct, costs in your calculations. Compare each fundraising activity’s return on investment so that you can focus your energies on what will bring you the greatest return. Diversify your revenue streams so that your organization is not dependent on one source of funding. Budget for a surplus. Then build wealth with your surplus funds so that you have money to use in a rainy say, can invest in your infrastructure, and have capital in cast you ever need to borrow. Avoid the common budgeting pitfalls that hinder financial stability and growth.