chapter 29
Developing a Budget
The first step in developing a fundraising plan is to develop a working budget. In its simplest form, a budget is a list of items on which you plan to spend money (expenses) and a list of sources from which you plan to receive money (income). A budget is balanced when the expenses and income are equal; an ideal budget projects more income than expenses. Budgets are usually prepared from year to year. Many organizations also create financial projections going out two or three years that allow them to see how money spent in one year might not be recouped until the third year, or to take into account the effect of a grant that may go over two years, but not be present in the third year.
There are many ways to prepare a budget. As organizations grow, they may change the way they prepare the budget a number of times before finding one that gives them the most accurate projections. In some organizations a single staff member prepares the entire budget and presents it for board approval, but this is a large burden for one person. Therefore, the method presented here assumes that a small committee will undertake the budget-setting process. This committee can be a standing finance committee of the board, which would then be in charge of monitoring the budget, or it can be an ad-hoc committee of two or three board members and a staff person. Many grassroots organizations lack expertise in developing budgets, so they recruit someone who has that experience onto their budget committee for that purpose. It is particularly helpful to have someone with financial expertise if you are switching systems or fiscal years or if you want to plan for more than one year at a time.
If you work with a committee, it should be limited to four or five members. Each should have some knowledge of the organization and be willing to put in the time it will take to do the job as thoroughly as possible.
There is a simple, two-step process for preparing a budget that most small nonprofit organizations can use effectively. The process takes into account the largest number of variables without requiring extensive research and can be done using a simple spreadsheet (or even old-fashioned paper and a calculator.)
STEP 1: ESTIMATE EXPENSES AND INCOME SEPARATELY
The budget committee should first divide into two subgroups: one to estimate expenses, the other to project income. When these tasks are completed, the subgroups will reconvene to mesh their work in the second step. If one or two people are preparing the budget, they need to figure expenses one day and income another day. Otherwise, the temptation is to make everything match up as they go along, which leads to inflated projections of income and inaccurately low projections of expenses. The committee should follow the old fundraising adage: “Plan expenses high and income low.”
Estimating Expenses
The people working on the expense side of the budget should prepare three columns of numbers representing “survival,” “reasonable,” and “maximum” expense figures, as shown in the example. The “survival” column spells out the amount of money the organization needs simply to stay open. If you are not able to raise this amount of money, you would have to shut your doors. Items here generally include minimum staff requirements, Wi-Fi access, postage, printing, and telephone. This column does not include the cost of doing new projects, salary increases, additional staff or consultants, or even office space, if it’s not necessary.
Next, prepare the “maximum” column: how much money your organization would need in order to operate at maximum effectiveness. This is not a dream budget, but a real estimate of how much it would cost to have a real impact on the issues you are addressing.
Finally, prepare the “reasonable” column: how much money the organization needs to do more than survive but still not meet all its goals. These figures should not be conceived of as simply the middle of the other two columns. For example, an organization’s leaders may feel that in order to accomplish any good work, each staff person needs a company cell phone, or they must raise salaries or offer more benefits to decrease staff turnover. These items may not be necessary to the organization’s survival, so they will not be included in the “survival” budget; however, they are imperative enough to the organization’s work to be included in the “reasonable” budget, which could bring the reasonable and maximum budgets closer together.
The “survival,” “reasonable,” and “maximum” columns, then, give the range of finances required to run the organization at various levels of functioning. If you have a year or two of financial history, you can use the line items and costs from previous years to help in creating your budget.
The process of figuring expenses must be done with great thoroughness and attention to detail. For example, to estimate how much you will spend on printing, think through all the items you will want to print and how many of each you will need. A simple mail appeal has at least three printed components—the letter, the return envelope, and the envelope the appeal is sent in. The budget for your online presence will need to include staff or consulting time for the person who updates the website, and the staff time required to respond to your info@ e-mail address or to process donations or orders given online. You may want to hire a consultant to help you expand your legacy giving program or to help work with the board. When you don’t know how much something will cost, do not guess. Take the time while creating the budget to find out.
To ensure completeness and accuracy in budget-setting, many organizations have found it helpful to send board and staff members to training sessions on financial planning.
| Sample Expense Projections | |||
| Item | Survival | Reasonable | Maximum |
| Personnel | |||
| Executive director | |||
| Development director | |||
| Community organizer | |||
| Program coordinator | |||
| Benefits and taxes (payroll, workers comp, health insurance) | |||
| TOTAL PERSONNEL | |||
| Professional Development (seminars, classes, coaching) | |||
| Staff Travel | |||
| Office Rent | |||
| Furniture and Equipment | |||
| Lease photocopier | |||
| Computers | |||
| Printers | |||
| Office supplies | |||
| Telephone and online | |||
| Telephone service(s) | |||
| IT Support/consultant | |||
| Internet service provider | |||
| Software updates | |||
| Web maintenance | |||
| Fundraising and Marketing | |||
| Fundraising costs, not including personnel | |||
| Consultants | |||
| Event planner | |||
| Other | |||
| Tech Support fees for database | |||
| Merchant fees | |||
| Other | |||
| Event costs | |||
| Printing | |||
| Design of print materials | |||
| Annual report | |||
| Mail appeals (specify numbers) | |||
| Event invitations and flyers | |||
| Newsletters | |||
| Premiums for donors | |||
| Other | |||
| TOTAL FUNDRAISING AND MARKETING | |||
| Postage | |||
| First-class mail | |||
| Bulk mail | |||
| Bulk mail permit | |||
| Other (specify) | |||
| TOTAL POSTAGE | |||
| Other Contractors | |||
| Bookkeeping | |||
| Training for board and staff | |||
| Board travel | |||
| Annual meeting or retreat presenters | |||
| Volunteer appreciation | |||
| Other (specify) | |||
| TOTAL COSTS (other than personnel) | |||
| GRAND TOTAL | |||
Projecting Income
At the same time that the expense side of the budget is being prepared, the other half of the committee is preparing the income side. Crucial to this process is knowledge of what fundraising strategies the organization can carry out and how much money these strategies can be expected to generate. Much of this information will come from reports kept in previous years. As shown in the example, the income side is also estimated in three columns, in this case representing “worst,” “likely,” and “ideal.”
To calculate the income projection labeled “worst,” take last year’s income sources and assume that with the same amount of effort the organization will at least be able to raise this amount again, unless you know that the effort expended was more than can be expected in future years or you were given some one-time-only gifts (such as bequests or gifts to a capital campaign), or your community has plunged into a deep recession. In the case of foundation, corporate, or government grants, it may be wise to write “zero” as the worst projection unless you have been promised or strongly led to believe a grant request will be funded or renewed.
Draw up the “ideal” income projections next. These figures reflect what would happen if all the organization’s fundraising strategies were successful and most grant proposals were funded. Again, this is not a dream budget. It does not assume events that will probably not occur, such as someone leaving you a million dollar bequest. The ideal budget must be one that would be met if everything went as well as it possibly could.
The “likely” column is a compromise. It estimates the income the organization can expect to generate with reasonable growth, hard work, most people keeping their promises, and expanding old fundraising strategies and having success with some new ones, yet taking into account that some things will not go as planned.
There are two ways to budget income and expenses from fundraising strategies: one is to show all expenses in the expense side (as shown in the example above) and all income on the income side. For small organizations, this is probably the simplest. The other is to show net income (after expenses) in the master budget, with a detailed expense and income budget available on a separate spreadsheet for each strategy. For organizations that do a lot of special events or conferences or that have fees and products for sale—in other words strategies that have a high gross income but a much lower net—this method will be more accurate overall.
The income and expense sides of the budget are presented in columns of numbers, but each subcommittee should also include a narrative or notes that explain some of the rationale behind the numbers and outline goals other than financial that some fundraising strategies will be seeking to accomplish.
| Sample Income Projections | |||
| Source | Worst | Likely | Ideal |
| Major Gifts | |||
| New | |||
| Renewals or upgrades | |||
| Monthly donors | |||
| Donors Giving Less than $250 | |||
| New (specify strategies) | |||
| Renewals | |||
| Recovery of lapsed donors | |||
| Special Appeals | |||
| Sale of Products | |||
| T-shirts | |||
| Other (specify) | |||
| Special Events (define whether net or gross) | |||
| House parties | |||
| Dance | |||
| Conference | |||
| Board Donations | |||
| Fees for Service | |||
| Foundations (specify) | |||
| Other (specify) | |||
| TOTAL INCOME | |||
STEP 2: MEET, COMPARE, NEGOTIATE
When the entire committee reconvenes, you hope to find that the amount in the “reasonable” expense column and the “likely” income column are close to the same. In that happy circumstance, those figures can be adopted as the budget with no more fuss. Occasionally, nonprofits are pleasantly surprised to discover that their “likely” income projections come close to their “maximum” expense projections. However, compromises usually need to be made. Most of the time the expenses need to be adjusted to meet realistic income potential, not the other way around. If you do what many organizations do, which is to boost income estimates to make the budget balance, you will soon be in financial trouble.
When no two sets of numbers are anywhere near alike, the committee will have to find solutions. There is no right or wrong way to negotiate at this point. If each committee has done its job properly, there will be no need to review each item to see whether it is accurate. However, with more research, each subcommittee may discover other ways to decrease expenses or add income.
As shown in the illustration, there are nine possible ways income and expense projections can match up.
Here are two case studies that illustrate different ways of reaching a workable budget using compromise and research.
These case studies illustrate that budgets are designed to be flexible, to serve as measurements of progress, and to provide structures for the way money is spent and raised. Using a budget this way makes it a helpful document rather than a club hanging over an organization’s head. Small organizations cannot know exactly how much money they will raise or spend beyond certain fixed costs, such as for rent or salaries, but they need the parameters that a budget can provide.
ONGOING MONITORING
Once the budget is developed and adopted, it must be monitored. Although you can monitor your budget using a spreadsheet, there are inexpensive accounting software programs that can issue profit and loss reports that will be easier to understand and examine (QuickBooks is the most commonly used program). Every month, you note what you have spent or raised in each category of your budget as well as the amounts you should have spent and raised in that time, if all the money were being raised and spent equally over the twelve-month period (you will have more income or more expenses in some months than in others, which should make the budget work out at the end of the year). You can then make adjustments as needed and catch problems fairly quickly. Do not change your budget—use it as a learning tool. Compare what you projected would happen with what did happen and discuss the differences. This way, as the years pass you will be able to create more and more accurate budgets.