Transcript Episode 138

Transcript Episode 138 – Nonprofit Budgeting for 2024: If You Haven’t Started Yet, You’re Behind on The Prosperous Nonprofit

Stephanie Skryzowski: [00:00:00] Welcome to the Prosperous Nonprofit, the podcast for leaders who are building financially sustainable and impactful nonprofits and changing the world. I’m Stephanie Skrzewski, a chief financial officer and founder and CEO of 100 Degrees Consulting. My personal mission is to empower leaders to better understand their numbers, to grow their impact and their income.

On this show, we talk to people who are leading the nonprofit sector in new, innovative, disruptive, and entrepreneurial ways, creating organizations that fuel their lives, their hearts, and their communities. Let’s dive in.

Hello, friends. How are you today? I am so glad you’re here listening to the Prosperous Nonprofit. If you have not yet followed the show, if you just happen to stumble upon us, I would love if you would go [00:01:00] into your Apple podcast player and click the plus sign follow. That way you get all new episodes dropped right into your podcast player and you don’t ever have to search for us again because we’ll be right there.

Okay. Today you’ve got a solo episode with me and we are talking all about budgeting. Yes, this episode is going live in October and I have some news for you. I hate to break it to you, but if your fiscal year starts January 1st and you have not yet thought about your 2024 budget, you are behind. Yep.

That’s right. I always recommend that we start thinking about the budget process in August or September. And so here we are in late October when you’re listening to this. And if you haven’t yet started, you’re a little bit behind the eight ball, but no worries. You can easily get caught up to speed.

There’s still plenty of time. Um, and the reason that I want you to start so early, [00:02:00] like literally four months before the fiscal year begins is because it’s really important to not just throw some numbers on a spreadsheet, right? The budget is really a piece of strategy, a document that is connected to your strategic plan.

So we don’t just want to throw some numbers together, right? We really want to be thinking strategically about allocating the resources that we have to achieve our biggest. goals. So here’s a few things I’m going to give you five tips and maybe a bonus tip or two thrown in there. Cause that’s just how I roll.

I’m going to give you five tips today in thinking about building your budget. And again, if you haven’t started, you’re behind, but no worries. You absolutely can catch up. So no judgment from me. You know, this is always a judgment free zone. Okay. So the first thing I want you to think about is your strategic plan, your mission, and your goals.

This should always be the first thing that we think [00:03:00] about when we are putting numbers to spreadsheets, right? So one mistake I see organizations making all the time is not connecting their budget to their strategic plan. And so basically we have these massive goals, these big programmatic things that we want to achieve.

But But then we don’t have the resources to actually be able to achieve them. And that’s pretty much just a recipe for failure, right? So we want to make sure that we take a look at our strategic plan. What does that say that we are supposed to get done this year? Right? What are the guideposts there that are like, okay, we’re going to achieve these programmatic objectives.

Then we want to make sure that as we’re building our budget. We are really making sure that we’ve got the resources to accomplish those. So if our strategic plan says we are going to expand into three new counties with our services, well, what is that going to take from a budget perspective? How many people do we need to expand into three new [00:04:00] counties?

Maybe we need a new office space in that area. Maybe there are some supplies that we need. Maybe there’s a consultant that needs to help us. Learn these counties regulations, right? There are so many things, so many possibilities, so many things that we might need in order to achieve that particular goal.

And especially when these things are kind of like extras or they’re outside of what you’ve spent money on before, it’s very easy to forget them. So I want you to take a step back, think from a 30, 000 foot view instead of just taking, you know, This year’s profit and loss statement or income statement, adjusting, tweaking it a little bit.

And while we have our 2024 budget, I want you to think more strategically, higher picture or higher, higher picture, bigger picture, bigger picture, higher 30, 000 feet, bigger picture, you know, all the big things, and really make sure this budget is aligning with your mission. So that was tip number one. Tip number two, I want you [00:05:00] to.

Involve other people. Okay. Now I am Okay, let me tell you a story. I have never been a group project kind of person I’ve always been the one that’s like I’m just gonna do this myself because it’s faster that way. It’s easier It’s probably gonna be better if I just do it myself. Like I was that girl. I remember in Grad school, there were like multiple occasions where we had group projects and I would always come up with some reason or excuse that I couldn’t work in a group and I had to do it myself.

It was at the time I was traveling quite a bit to Afghanistan. And so that was usually my go to excuse why I needed to do the project by myself. Well, I’m going to be in Afghanistan for the next. So I’m not really going to be a good team player. So I’m just going to take this one myself. And I feel like just dropping that Afghanistan, people were always, my professors were always like, Oh, okay.

You’re going to Afghanistan. Sure. You can do this one by yourself. [00:06:00] Don’t be me. Don’t be me. The budget really needs to be a team effort. I’ve seen a lot of times, maybe the executive director and the finance director lock themselves in a room, create the budget together, present it to the board, and then like a month or two later, share it with the team.

Hey everybody, here’s your budget for next year. Well, that’s kind of a recipe for… Failure for disaster for not getting the buy in that you need from the team. And you’re probably not going to be super aligned with the goals that the program team has if we don’t, you know, if you haven’t really asked them, what do they need to accomplish these objectives?

Right. So we really want to involve our team. And so what that looks like is, you know, the finance director is usually the person that’s in charge, but what is really important is then sort of outsourcing, delegating the budget for each department or each program area, however your organization is split up.[00:07:00] 

Delegating the budgeting for that particular piece of the budget to them, right? Nobody knows their program better than they do. And so the finance director, I really recommend doing it like this where the finance director builds out the template and then gives them the template and says, okay, here’s your budget template.

Here are your big picture parameters. Maybe the big picture parameters. Is like, you can’t grow, like we, we need to stay within 10 percent of last year, or we need to stay within 20 percent of last year. Like you can’t grow more than 20 percent or maybe it’s a number like, okay, your budget for your area is 500, 000.

You can do with that, whatever you’d like, you can allocate that however you want, but your budget is 500, 000. Right. So. Giving some parameters is very important. Now, I have done this and not given parameters before. And what happens is you get these amazing, [00:08:00] beautiful pie in the sky budgets and then the executive director or the development team is like, Yeah, we can’t really like 5X our revenue this year.

Um, that’s not going to be doable. So now we have to go back to everybody and say, okay, now you got to cut your budget and that’s not fun, right? That is a, like a pretty big dig into morale. We don’t want to have to cut people’s budgets once they put together, you know, once they spent the time to put it together.

So parameters are important and the template is important too. I know it sounds silly, but like not everybody does. Excel. Well, that’s just the truth. And not everybody does Excel the way that you’re going to need to present it to the board. Right? So if you’re just like, okay, give me your budget, here’s your parameters, send me back your budget.

And you know, the next three weeks you’re going to get as many different spreadsheets as people that you [00:09:00] assigned the budget to, right? There’s going to be colors, there’s going to be different fonts. There’s going to be probably no formulas. Like, you need to give them some guidance, right? And not everyone is.

I’m not meaning to say like people are inept with Excel. That’s not true. But we need the format to be in a way that we can easily consolidate it and be able to analyze it, right? We need to be able to put all the little pieces together and then see the big picture and then present that to the board. So that piece is super important.

Give them a template. This also really makes sure that everyone’s insights and perspectives are considered and they have a sense of ownership in the budget, right? Also the last piece about this, your budget’s going to be way more accurate, right? It’s going to be way more accurate rather than the finance director, the executive director, CEO, just sitting in a room and guessing.

Whoever runs that department is going to know much, with much more clarity and much more detail, like, okay, what actually goes into this? Okay, so that was [00:10:00] number two, involving the team. Number three, planning for sustainability is huge and this is something I often see nonprofits It’s kind of forgetting about.

And a couple things I mean by this. First is cash flow. So I see organizations, one big mistake I see making, um, a lot of nonprofits making is that we are building a break even budget where every single year. We are, we’re budgeting for as much revenue as we have expenses and vice versa. So if we have 2 million in expenses, we are planning for 2 million in revenue and not a penny more.

What that means is that likely we don’t have any cash left over at the end. Now, you probably, if you have followed along with me, if you know my work, if you’ve ever heard me speak, you know, like I talk all the time. Yes, we’re nonprofits, but that doesn’t mean we can’t have any money left over at the end of the year.

Right? That [00:11:00] is a recipe for a constant hamster wheel, a constant starting from zero at the beginning of every single year. That’s not sustainable. Right? You are going to burn out your leadership, your development team. If we’re starting from zero every single year and the pressure’s on, right? Like if we miss anything, if for whatever reason, that 200, 000 grant that we were so certain was going to come through, hey, they changed priorities at the foundation.

And you’re not getting that grant anymore. Well, now we have a big hole that we need to dig out of. That’s very stressful, right? So planning for sustainability means a couple different things. It means that we need to have some cash leftover at the end of the year. And so I want you to plan for that in your budgeting process.

So not only are we going to budget revenue and expenses, but we’re also going to. Budget cashflow. And so I want you in addition [00:12:00] to mapping out your revenue plan month by month for the year, your expenses month by month for your map out your inflows and outflows of cash month by month for the year. That way we can see, okay, are there any gaps here?

If we started this year with like 10 grand in the bank, well, we’re going to end this year with 10 grand in the bank again, unless we raise more money, right? Or unless we cut expenses in some way. So I want you to plan for a cash reserve. There’s some statistic that says that like less than half of nonprofits have, I think it’s like three months expenses in the bank, less than half have three months of expenses in the bank.

And there’s some very large percentage, maybe like 20 or 30%. That have less than one month of cash in the bank one month my friends That’s like a few donations a few grant payments don’t come in and we can’t make payroll, right? so I want you to plan for Sustainability right set aside funds [00:13:00] for contingency Build your reserve, invest in capacity building activities that is going to strengthen your organization.

So number three is plan for sustainability, right? That cash reserve is not going to build itself. We need to plan for it and intentionally. Make sure that we’re accounting for it. Okay. So that was number three.

Have you been spinning your wheels trying to figure out how some nonprofits have three or six months of a cash reserve while you’re barely scraping by to make payroll every two weeks? I’d venture to guess that one of the reasons you feel overwhelmed and nervous about your cash situation is because you don’t have a.

So I’ve created a free cash forecast template for you. This spreadsheet will help you forecast your cashflow, build an insightful budget and really help you see into the future of your revenue and expenses. I’ve built the template for you. Now all you have to do is use it, gain more [00:14:00] clarity into your numbers.

You can make smart decisions today. To grow your impact and income tomorrow, head over to 100 degrees to get your free spreadsheet.

So my fourth tip today is to use a lot of different sources to put together your budget, right? So what we don’t wanna do is just look at what we did last year for each line item in the budget, and then add 10%, right? Or. And 20 percent or just keep it even or whatever. Right? Like we don’t want to use just one point to build this budget.

Um, and that goes for revenue and expenses, right? Just because you did, you know, 500, 000 in foundation grants last year. It doesn’t mean you should. Slap 500, 000 in foundation grants into your budget for this year. Yes, it is a [00:15:00] point. It’s a place to start from what happened last year, but it’s not everything, right?

The budgeting season budget and time is a really good time to think critically about like. Okay, well, we spent 10 grand in software last year, so let’s put like 11 grand in software this year. No, because first of all, are we actually using all of this software, right? Like what team members make sense to, to have, oh, we had budgeted for a marketing person to start in.

Whatever in, in November, but now they’re going to start in Jan or we’ll just put it in January. Now we’ll wait a sec. Do we actually need this marketing person? Does that make sense? Right. Is there an ROI on adding this new team member? So thinking about not only what we did this year. Um, but also being a little bit critical of it, right?

Like, oh, we invested, you know, 10, 000 in software, like, did we actually get an ROI on [00:16:00] these tools? If we didn’t, well, let’s not continue them into next year, right? So really going a little bit deeper than just building it entirely based off of revenue and expenses this year. The other thing that I want you to look at is your revenue sources.

Let’s call this tip number five, really creating a plan for revenue. And I’ve seen organizations build their revenue budget a couple different ways. And there is a way I strongly prefer. Okay. So the first way is to say, all right, well, if we want to. Well, we want to take care of our team and we want to make sure we have sufficient infrastructure, all of that is going to cost us two million dollars next year.

Okay, cool. All right, well, that means we need to raise say, 20, 000. 2. 1 million. We’re going to give ourselves a little buffer there. A little 5 percent buffer. We need to raise 2. [00:17:00] 1 million. Okay, cool. Well, last year about 10 percent came from individuals and 20 percent came from corporations and 60 percent came from foundations and another 10 percent came from a small government grant.

Cool. Well, let’s take those percentages now and apply them to the new revenue number. 2. 1 million dollars. And boom, there’s our goal. Okay, let’s get to work. I don’t really love this. And if you’re listening, do you know why I don’t really love this? I don’t love this because that is based on nothing, right?

Like, how do we know if that government grant that made up 10 percent of our revenue last year is even available this year? And who knows if they’re going to give us more money or like, what’s our strategy? To get that, you know, what did I say? 10 percent from individual donors. Like we have a strategy for that.

Like I don’t like, especially when it comes to revenue, just applying blanket numbers and then like [00:18:00] January 1st, putting our feet to the pavement and like hoping for the best. Right. The other kind of revenue budgeting that I really like is starting with. Okay. What is confirmed? Right? A lot of times we are going into the year and we already have revenue confirmed.

Either it is like, you know, we’re about to sign a grant agreement and we’re in talks and we’re going to do that in January or maybe it’s a multi year grant. So we already have pieces of revenue confirmed. I like to start with, all right, let’s build out what is confirmed first. Yeah, maybe you have commitments or, or whatnot.

So let’s start with what’s confirmed. Then let’s start with, let’s go to what is highly likely, right? So highly likely would, you know, this is going to be different for every organization, but maybe you know that you have a particular donor that gives you 25, 000 every year. You just talked to them last month.

They’re going to write you the check, you know, in Q1, like, you [00:19:00] know, it’s coming. That’s highly likely. Maybe it’s a funder that you have gotten money from before, and you know that, you know, they typically renew you. You’re still within their funding cycle. You feel pretty good about it. Highly likely, right?

Then we’re going, and maybe, you know, thinking about like individuals as well. Maybe you have like a pretty solid individual giving, um, plan and strategy and you know, the last three years you’ve raised a hundred thousand dollars. And so you feel pretty good about putting a hundred thousand dollars in the budget this year.

Highly likely, right? And then, then there’s the bucket of like, wishful thinking. Just kidding. Don’t call it that. New opportunities. Right. Or like unknown opportunities. Again, maybe don’t call it that either. Um, new opportunities. And so these are, these are areas where it’s like, okay, this is a new funder.

We are applying for their grant. We have no idea if we’re going to get it. We feel pretty good about it. But that’s going to go into a [00:20:00] different bucket because what if that, what if that’s 500, 000 on a 2 million budget, right? That’s 25%. That’s a quarter of your budget. You’re putting a lot of eggs into that basket.

And if that grant doesn’t come through. Then what, right? So we don’t necessarily want to build this into these sort of new opportunities into our budget. So what I want you to do is start with confirmed and highly likely and see where that gets you, right? How close are you to your expense number? Then you have a decision to make, right?

You can say, okay. Um, we still have a gap of, you know, say a 20 percent or 30 percent gap to meet our expenses. So what do we want to do here? Do we want to say, okay, well this is the gap that we need to fill and we’re going to go all in on trying to fill it. Do we want to then reduce expenses instead?

Right. And say, okay, well we can add in these additional expenses [00:21:00] if and when we get this money, right? You have a couple options, um, but I think it’s really important to be intentional because Um, if I’m a board member or a finance committee member and I’m being presented a budget, I want to know what is our level of confidence in hitting this revenue number, especially if you are budgeting with a razor thin margin where it’s like, if we screw up or like not even us, right.

If a foundation, if, if donors just like are not donating this year. How much of a hole is that going to put us in? So I really want you to be intentional with your revenue budgeting. Be very strategic with it. Think about it as confirmed, as highly likely, and then all the other stuff. See where you get with just those top two categories and then make a decision on how you’re going to proceed, right?

Because We don’t want to go into the year with blinders on or with like blurry vision on exactly what we need to accomplish. Right. Because if [00:22:00] we are not clear on like we have a 300, 000 funding gap that we need to start attacking from day one, or even now, right? Like we don’t need to wait until January 1st.

We can start working on that right now. Versus putting all of our efforts into things that are highly likely and kind of forgetting about this giant gap until the end of the year, right? So really being strategic and intentional about budgeting your revenue is huge. Hugely important. Okay. So that was tip number five.

And tip number six. Maybe I have seven for you. No, I’ll, I’ll stick with six. Tip number six, invest in financial management. Okay, listen, this is not a shameless plug for my company, 100 Degrees Consulting, and we provide CFO and bookkeeping services. You all know that, but okay, maybe that was a shameless plug.

But no, I’m serious. Invest in financial management. Listen, financial management, a bookkeeper, a CFO. A controller, whatever it might be, essentially it’s an admin [00:23:00] expense and it doesn’t feel great to add a bunch of admin or quote unquote overhead expenses to our budget. But listen, this is going to help you so much, right?

A CFO, a bookkeeper is going to help you maintain accurate financial records, implement strong internal controls. Support your audit likely get a lot of work off of your plate when it comes to managing the numbers. Also, they can help you build this budget so you’re not alone with your thoughts and a spreadsheet, right?

So think about investing in financial management as you are building your budget for next year. It often like pays for itself. And that’s kind of funny to say, but there often is a pretty big ROI on bringing in a finance person into your organization, even if they are just on a fractional basis. Often they are finding ways to create efficiencies, streamline expenses, maybe thinking about new revenue opportunities.

And so if you’ve got a strategic CFO on your [00:24:00] team, they can often help. I mean, not often help with the finance, they do help in the finances, but they can often really generate an ROI on their own expense, right on their own salary. So those were my five tips. Like I said, if you’ve not yet started your budget by the time you’re listening to this, if you’re listening, when it drops in October, please get started now, right?

We want to make sure we have time to really be strategic and not just plunk some numbers into Excel based on what we did last year and hope for the best, right? This should be a really strategic exercise. And just to recap, the five tips that I mentioned were aligning your budget with your mission, with your goals, with your strategic plan.

The second one was involving your team. The third one was planning for sustainability. The fourth one. To use a lot of different sources to put together your budget. The fifth one was strategically and intentionally build [00:25:00] your revenue budget. And the sixth bonus tip was investing in financial management.

Okay, friends, I hope this was helpful. I’m super excited for you to dive into your budgeting process. It’s one of my favorite times of year because I love numbers. I love planning. I love thinking about goals. So this is like my Super Bowl. All right, friends, have fun. If you have not yet followed the podcast, please go do that.

Push the little plus sign follow on Apple podcasts or on wherever you listen to this podcast and I will see you next time. Before you go, I just want to thank you for being here. To access our show notes and bonus content, visit 100degreespodcast. com. That’s 100degreespodcast. com and I’ll see you next time.