Why Nonprofits Never Have Enough Money

How did the board meeting go?

“Great,” says my client. “Actually, I was so relieved! The budget passed in like 15 minutes. There were 2 or 3 minor questions, but nothing substantive.”

Um, I’ve got some bad news. This is not what I consider a great budget discussion.

Executive Directors like my client are afraid of two key things:

1. The board will micromanage the process and the numbers. They’ll walk among the trees and forget they are supposed to be forest people.
2. The board will believe the revenue numbers are too aggressive or too conservative and never once mention its own responsibility in where those numbers will wind up.

So the way it ends up working most of the time is this:

1. The staff has some tough conversations.
2. They present a neat and tidy budget to the Finance Committee (you do have one, don’t you?)
3. The Finance Committee asks a few good questions, typically about the revenue assumptions.
4. The program side asks a question or two – cost of benefits, or sometimes the totally dreaded questions about whether someone is overpaid.

Guess what? This isn’t how it should look at all. What should budgeting for nonprofits look like? I’ll tell you.

But more importantly, I have an idea — a “budgeting for nonprofits” process — that could in fact engage and inspire your board to raise even more money than you were planning to budget for in the first place.

WHY NONPROFITS NEVER HAVE ENOUGH MONEY

The board looks at the budget and sees “tidy.” But it didn’t start out tidy. It started out with program folks who really need resources and development staff to work their hardest to project the highest possible number.

Projected revenues and needed expenses never match. But by the time they hit the Finance Committee, they get massaged by staff to be very close. By the time they hit the full board, they are even.

Voila. Revenue = Expenses.

And that’s sure easy for the board to just approve, isn’t it? No wonder budget approval goes by lickety split.

BUDGETING FOR NONPROFITS: A NEW PROCESS THAT WILL ENGAGE THE BOARD

• Include in the budget everything you need. The staff shouldn’t overly worry about whether things fit into a flat budget. They should worry if the budget doesn’t include everything they think they need to do their jobs properly. I’m not saying they should go ‘hog wild’ here, but I’m talking the resources they truly believe they need.

• Have Development create the revenue budget separately. It should be very detailed. It should include the individual donor renewal rate for last year and how the Development team is going to improve that (perhaps better resources re: data tracking?). It should have a great deal of back up and “proof,” such as the number of new donors at each level from last year and percentage you believe will renew. List foundations that are up for renewal and perhaps a list of new foundations to explore. For each institutional funder, there should be a percentage likelihood attached for Finance Committee review.

Now it gets fun.

• Get back to work. The gap will be wide and the E.D. gets to mediate / push / challenge and send everyone back with work to do. But the charge is not just to cut (expenses) and add (revenue.) There’s one more important step.

• Make a list. One more meeting – just staff. Reviewing the numbers that are way closer. The E.D. plays the decider and brings them close enough to review with the Finance Committee. Here’s what will happen. The program staff will be dissatisfied and the development staff will feel pressure. But here’s where it’s different – there is one more document for review that is put together jointly by the program and development team. It’s what I like to call the “NOT-A-WISH list.” For each department, it lists all the critical items that were cut in order to get the budget this close. It shouldn’t be more than two pages and it should be simple enough for a 12-year old to understand. What you need. What it will cost. Why it will allow you to do your very best work. And don’t forget to total all the expenses that never made it into the draft budget they are reviewing.The list will not seem crazy. In fact, the list will make everyone crazy. How can we NOT include that in the budget? We have to add another lawyer? She can’t possibly raise that money without a data manager!

Now you are finally ready for your Finance Committee.

• The Finance Committee Meeting. You present the budget. It’s close. You say, “The budget we will now present still needs work before the board can approve it. Before we dig into it, we’d like to review our process with you. Getting the budget to this point is hard. It requires sacrifices. It’s imperfect. As it currently stands, it will enable us to do a lot of great work, but perhaps not our very best work.”Show them the “NOT-A-WISH list.” By setting things up this way, you will begin a thoughtful and honest conversation the likes of which most nonprofits do not experience. See where it takes you. See if you have board members who are smart, strategic, and step up. See if anyone mentions the board’s responsibility to add money to the coffers. I bet it happens. And as you go through the process, refuse to ditch the “NOT-MY-WISH list.” It must be right there for everyone to see every time the budget is discussed.

So what is the purpose of this exercise? It brings to life a reasonable list of program-related work or work critical to doing that program work that is NOT in the budget at all.

It struck me the other day when I was speaking with a client whose board approved a $7 million budget in about 10 minutes. I’m working with him on effective time management. I asked him, “Does your board realize that you don’t have an assistant?”

I don’t know why I bothered asking – I knew the answer. He had cut it from the budget so he could get another researcher he needed. But he did that before the board even had the opportunity to understand that, as a consequence, he spent ninety minutes last week booking his own travel for a trip. How is that a good use of the leader’s time?

WHAT COULD HAPPEN WHEN IT’S TIME TO VOTE

Budgeting for nonprofits isn’t easy and no board member should ever feel completely satisfied approving a budget. Every board member should say ‘aye’ with one hand in the air and the other holding the “NOT-MY-WISH list.”  

A “home run” board would set its own target to add new money of X dollars so that the most important thing could come off the list and into the budget.

A very strategic board will ask for the Finance Committee to dig deeper into the quarterly actuals vs. budget. Board and staff should look closely at estimates of revenue and expense and ask for details about the revenue numbers – are we ahead or behind? Is it timing? Or real? Do we have savings on the expense side that are real? And then guess what? It’s time to take out the list.

You may not make a single change. You might take one thing off the list and decide to move forward on it. You may table the discussion and say that if we stay on this track, that next quarter we should move some things from the list back into the budget.

MOVING FROM “WHAT CAN WE AFFORD” TO “WHAT IS POSSIBLE?”

Every single time there is a discussion about money, your board and Development people will see right there in front of them that there are real and legitimate expenses that would move your organization from “good to great” or from 4-star to 5-star.

They will all make a stronger connection between the numbers they see and the work you do, the clients you advocate for, the change you seek.

With every review of that list they will remember that that money = programs.

And the conversation has the potential to shift from “what we can afford” to “what is possible.”

YOUR NEXT STEPS

I rarely ask for this, but I think this “budgeting for nonprofits” process can be so transformative that I want everyone doing this. Please share and spread this post on Facebook, Twitter, and anywhere else you see fit.

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Finally, if board governance and oversight of the finances isn’t taken seriously at your nonprofit, here are two free templates you can download to help get the board “on board”… Is “Board Governance” a Dirty Word at Your Nonprofit?