Nonprofit budgets do NOT need to balance. Nor should they.
In December 2019, Jeanne Bell of Nonprofit Quarterly and I led the first of a two-part webinar series on strategic nonprofit budgeting. One of the things we inevitably covered, even though I wish we no longer had to, was dispelling the myth that nonprofit budgets should balance. And predictably, there was a raising of cyber hands pushing back against that point. So, because the mythology of the need for break-even nonprofit budgets persists, I thought it was worth repeating as we start a new year – and as many nonprofits begin their budgeting cycles: Nonprofit budgets do NOT need to balance. Nor should they.
We’ve long argued at Propel Nonprofits that break-even budgets are not only not required, but they are the biggest barrier to building reserves and ultimately a financially healthy organization. A perfectly balanced budget has been forced in some way; the only reason it comes to zero is that you’ve plugged a number somewhere. Releasing yourself from the mindset of a budget needing to balance also frees you from forcing numbers that aren’t reality-based.
I also think it’s helpful to remember that there’s a bit of fiction in creating a discrete 12-month budget. Of course, 1-year budgets are an essential tool for planning and management tracking. They’re what we produce for boards to approve, for grant requests, and to support many other accounting operations and processes that are inherently part of doing business. However, time is relative, and a 12-month period is ultimately an arbitrary slice of time in a larger arc of an organization’s life – of strategic milestones, grant approvals or rejections, donation cycles, and economic ebbs and flows. Because any yearlong scope is part of a larger trajectory, a budget will naturally have either a surplus or a deficit. That’s good. That’s reality.
The fear or resistance to a budget that has either a surplus or a deficit often comes from how to communicate anything other than a zero. Ask yourself: Who is your audience? Why are you feeling defensive about showing a surplus? What assumptions are you making if your budget shows a deficit? Because we’ve unfortunately been conditioned with a nonprofit starvation or need-based mindset, that fear can be justified. That is why it’s doubly important to start changing that narrative, and that starts with how you communicate the (very justifiable) reasons for why your budget does not come out to zero.
Jeanne Bell does a great job of spelling out the different scenarios for different budget outcomes in this blog. As you communicate about your budget surplus or deficit, tie your narrative to your nonprofit’s values. A surplus builds the flex and freedom to be more creative and responsive in your programming. Perhaps you’re budgeting for a deficit because it’s time to make some strategic investments to meet those stretch goals in your strategic plan. Be open and transparent, and welcome questions and a conversation.
I also recognize that grant and contract budgets will balance, so I’d be remiss not to mention that when it comes to grant budgets, be sure to budget for your true program costs. Your budget will still balance, but not at the expense of overpromising what you can deliver for the budgeted amount or hiding the real costs you have to cover from some “other source.”
Grant and contract budgets will balance; organizational annual budgets probably won’t – just say it.
Budgeting is a great opportunity to have strategic conversations across your organization and with your board about how your finances are supporting your goals and mission. Join Jeanne and me on January 23 for the second Nonprofit Quarterly webinar on The Engaged Nonprofit Budget: Budgeting for the Organization You Want to Be (Cost: $69) to continue this conversation.