As we enter the fourth quarter, many nonprofit organizations are getting more specific about their financial plans for 2013. In the scramble to produce a budget in time for year’s close, leaders sometimes lose sight of the larger purpose behind the planning.  A budget is more than just an articulation of how an organization makes and spends its money. Done well, a budget serves to:

  • Make the business case for mission-related goals
  • Provide an organizational road map to align staff
  • Intentionally allocate resources among competing priorities
  • Monitor actual performance against plan to inform action 

Developing a thoughtful, fact-based budget that resources your programs while contributing to a healthier organization doesn’t have to be hard. In this post, we share a few budgeting principles and tips to guide you through the planning process.

Strategy comes first. In NFF’s experience, organizations too often use the annual budgeting process to drive their strategy, when really, the reverse approach is needed: a nonprofit’s mission and business objectives should always steer its budget.  A good financial plan takes stock of where an organization is today and reflects its operating and program priorities for the years to come.  It provides leadership with the data to track progress toward strategic goals and ultimately, to make course corrections when the situation demands.

Look to past performance to ground your plan in reality. It’s helpful to base future budget decisions on more than one year of financial history. When examined over time, trends in revenue and expenses can illuminate areas of volatility, growth and poor performance. By scrutinizing a few years of recent financial information, nonprofit leaders can answer questions such as: What are our sources of reliable revenue and which income streams are less predictable?  Which expenses drive our overall cost structure and how have they changed over time? Are we generating surpluses to contribute to savings?

Through a partnership with GuideStar, NFF recently launched Financial SCAN, an easy to use and affordable online tool that can help nonprofit leaders conduct a multi-year analysis of financial performance using Form 990 financial data. Running a Financial SCAN report on your organization provides a clear, comprehensive picture of your organization’s recent financial past, offering real financial data points to guide choices that can be reflected in your budgets.

Consider future goals to keep current plans aligned with strategic direction. By consistently anchoring budget decisions in the past without consideration of the future, you run the risk of creating stagnant plans or reflecting over-zealous ambitions. The budget decisions your organization makes today should reflect your broader program and organizational goals and objectives.  What business and mission priorities will you set this year to help move closer toward your longer-term goals? How will these priorities and the activities they require translate into revenue and expenses? What investments will you need to make in your balance sheet so that you have the cash you need to manage the risk or unpredictability in your strategy?  Every year provides an opportunity to make progress on your organization’s strategic goals by reflecting them in the budget.

Next: Getting Tactical!