In a time of fundraising shortfalls, economic uncertainties, staffing shortages, and day-to-day operational challenges, nonprofits are positioned to respond to emerging challenges proactively.
Effective financial planning and budgeting allow your nonprofit to turn challenges into opportunities for sustainable impact. Addressing forward-facing challenges like constrained budgets, limited capacity, cash flow pressures, and strategic planning gaps requires thoughtful preparation. However, incorporating strategy and financial management flexibility can yield more substantial fiscal outcomes.
Nonprofit budgeting best practices
Your budget is a dynamic tool that should evolve alongside your nonprofit.
Follow this blog for tips on how to develop a nonprofit budget.
Budgets must be based on past-year performance, but responsive to every sort of scenario your organization could face in the coming year. Your accounting team should reevaluate and update your organization’s budget to properly reflect the year’s performance and the emergence of new income sources.
As your team works, be aware of unusual funding or multi-year grants. While these funds can be disruptive to budgets initially, properly documenting and communicating the impact the funding will have can help your nonprofit generate greater fiscal returns. We’ll explore how to manage unusual funding and multi-year grants.
Managing unusual funding and multi-year grants
Unusual funding takes many forms. From large, one-time donations/gifts to endowments, capital campaigns, membership assessments, milestone anniversary events, and other similar donations, unusual funding increases cash flow without the usual procedures of the grant process.
This funding has several immediate benefits but can become a challenge in the years following the receipt of these funds because the funding rarely lines up with a singular fiscal year. Even a six-month grant can materially impact multiple fiscal years of budgets.
Effectively managing unusual funding and multi-year grants begins with a two-pronged approach:
- Start by preparing financial schedules that show the anticipated annual usage of multi-year grants for the life of the grant or the expected usage period for the unusual funding.
- Communicate the lifespan or anticipated usage in a multi-year format to move attention away from the impact on any single year.
After accepting these funding sources, your organization will want to rely on a usage authorization period and include the grant or unusual funding in all planning and related communications.
For example, when it comes to multi-year grants, begin by documenting the life of the grant in your budget and align your intended spending annually, starting with the fiscal year your nonprofit receives the funding.
Planning and properly communicating unusual funding positions your nonprofit to weather any uncertainty by knowing these funds are available. However, it’s not the only thing your organization can do to better plan emerging challenges. Your accounting team also needs to embrace capital budgets.
Creating capital budgets
Annual operating budgets frequently cover short time periods. Finance teams often build operating budgets without incorporating expanding or changing future capital infrastructure. When considering sustainability, capacity, and cash flow planning, creating and integrating a capital budget to account for infrastructure needs is crucial.
Capital budgets account for your organization’s current physical capital needs and future planning. Without accounting for asset depreciation, managing long-term cash flow needs becomes difficult.
Consider your organization’s current physical infrastructure. If you have assets that are in service past their useful life, there’s danger or immediate operational disruption if one of the assets fails.
Capital budgets allow your organization to anticipate when it will have to replace aging physical assets, so you can create a plan to do so without breaking the bank.
Your capital budget should include:
- Asset Purchases: including equipment, planned M&A, or other similar physical assets
- Asset Investments: including any investment in an asset or the production costs of an associated facility
- Financial Stability Goals: including asset loans, potential asset lifespans, and any improvement projects
- Strategic Objectives: including how the assets support strategic initiatives
By combining effective annual operating budgets with capital budgets, your nonprofit positions itself to navigate financial uncertainty while advancing its mission. Transparent communication, forward-thinking planning, and a commitment to long-term sustainability will empower your organization to thrive despite evolving challenges.
Ready to strengthen your nonprofit’s financial strategy? Explore the Comprehensive Go-to Guide for Accounting for actionable insights on nonprofit operations.
