Five Tips for Nonprofit Budget Analysis

The pandemic continues to impact nonprofits, both increasing the demand for their services and decreasing the availability of funding for them. In a survey of 66 nonprofits conducted by Nonprofit New York, 64% of New York nonprofits experienced a disruption of services and a reported total of $31M in lost revenue. Beyond their services, nonprofits employ nearly 18% of New York City workers, many of whom are women and people of color. Now with COVID restrictions lifting, many organizations are reflecting on their path forward. Funding from the federal government, state funding like in Connecticut, and increased indirect cost support in NYC provide an opportunity for nonprofits to review and bolster their budgets. Now is the time to conduct a budget analysis, as your findings can help you better understand your organization’s needs and areas of strength as you pursue funding. Below are five considerations you should think about when assessing and developing your nonprofit’s budget.

Accountability and Measures of Success

Your budget reflects your organization’s priorities. The budget planning process is a key tool to help you operationalize your nonprofit’s mission. You can ensure your organization’s vision stays on track by setting both programmatic and operational goals, defining performance measures, and setting up program evaluation systems.

• Goals can be set for any operational or programmatic aspect of an organization, but they should be specific, measurable, and have target dates attached to them. Goals can include revenue targets, plans for a community project, or planning towards a deficit, surplus, or net-zero. Organizations should aim for specific goals within these broader ones. For example, if a nonprofit targets $100K in revenue for the fiscal year, this can be broken into monthly or quarterly targets, targets based on funding streams (grants, donations, online v. in-person fundraising, merchandise, etc.), outcomes-based targets, project-based targets, and other milestones that must be reached before achieving that final goal.
• Performance measures can include returns on investments (ROI), operating surplus/deficit, and program efficiency. Setting trackable budget measures that align with your organizational goals, regularly reviewing them, and evaluating how indicators trend alone and with each other can help lay out your nonprofit’s trajectory, ensure accountability toward organizational goals, and identify areas of opportunity and potential risks.
• While performance measurement is an ongoing way to track your organization’s key indicators over time, program evaluations answer specific questions about a program to ensure your clients are being served as effectively and intentionally as possible. Program evaluations can include impact assessments, outcome assessments, and process assessments, to name a few, and can be conducted via surveys, focus groups, observations, interviews, and more. Defining program outcomes and key questions early in program development can support the evaluation process and thus help tailor programs, improve processes, and better understand your clients. In some cases, evaluations can help you determine when a program is not having its desired impact, allowing you to refocus your resources to be more effective. Learn more about program evaluation strategies here.

Evaluating Funding Sources (Revenue Analysis)

Evaluating where your nonprofit has had the most success receiving revenue can position you to better target your efforts. Review different revenue streams month-to-month and year-to-year to apply resources to the areas where they are most likely to receive the highest return on investment. By assessing and tracking measures like event turnout, response to fundraising initiatives, grants approved or denied, and their commonalities, can lead to more impactful fundraising efforts. At the same time, you should consider the costs of obtaining this revenue (events, professional fundraising, staff time, merchandise, etc.) to ensure that costs to pursue funding do not outweigh their value.

You should also consider the availability and use of restricted and unrestricted funds. Funding tied to a specific program, contract requirement (pay-for-performance, fixed price, etc.), and other restricted funding sources should be balanced with unrestricted funds that can cover overhead and allow more flexible allocation of an organization’s resources.

Beyond internal reviews, evaluating 990s of other nonprofits with similar missions, covering similar areas, and/or serving similar target populations, etc., can provide insights into how and where your organization’s peers are successfully fundraising. Another helpful source of benchmarks are third party organizations, such as Charity Navigator and Cultural Data Project, whose networks of data sources go beyond organizations you know. Their national perspectives allow you to benchmark your finances with comparable organizations across the country.

Cost Analysis

Alongside revenue analysis, cost analysis is essential to ensuring that the revenue received aligns with costs. Assessing fixed, semi-variable, and variable costs and outlining overhead, labor, contract, and supply costs allows organizations to budget more accurately. Additionally, defining direct and indirect costs better positions an organization to receive funding and remain accountable to all stakeholders. One strategy is to allocate indirect costs by program rather than department (HR, Finance, etc.) to better capture the relationship between the most scrutinized indirect costs and the provision of direct services.

Variance Analysis

Budgets are never final until the fiscal year closes out. Be sure to regularly assess variances, or spending above or below the initial budgeted amount, to help with both your long-term planning and short-term adjustments. These can include cost (both direct and indirect) variances and revenue variances. To monitor variances, set a tolerance level (generally no higher than 10%), develop a response plan for when they appear, and remain transparent about changes with teams and boards. This strategy can help your organization get ahead of changes in operating conditions, take advantage of opportunities, and address risks. FMD Pro provides a basic variance analysis template and other tools tailored to supporting non-financial managers in humanitarian organizations.

Scenario Planning

The events of the past year confirmed that it is best to plan for multiple budget scenarios. Scenario planning considers both internal (human resources, contracts, etc.) and external (other nonprofits, policy changes, economic changes, etc.) factors that may cause deviations from a planned budget by developing best-case and worst-case scenario budgets, and any scenarios in between. Scenario plans can also serve as the response plan to variances discovered during variance analyses. Of course, it is impossible to predict every scenario, so it is important to give more weight and consideration to scenarios with the highest probability and the largest potential impact. This is also a great way to engage your nonprofit board in the budget planning process.

It is often challenging to focus on both administrative processes and an organization’s mission, but budget planning and analysis is only as elaborate as you want it to be. Implementing basic checks and balances like the ones listed above can help leave your organization better positioned to both avoid issues and fulfill its mission. Public Works provides a host of tools and services to help you plan and implement your new budget. Learn more here.