With all the economic upheaval that COVID-19 has brought to 2020, budgeting for 2021 is sure to be challenging for many nonprofits. Some nonprofits cut back their services, operations and staffing during 2020, and others changed their mission to address more pressing community needs. Fundraising events often were curtailed due to social distancing; as a result, many organizations received fewer donations than usual.
While the budgeting process is often difficult for nonprofits, the pandemic makes it even harder to forecast next year’s income and expenses. As we slowly move closer to returning to what everyone hopes is “business as usual,” nonprofits should take time now to reconsider their income and expenses and recast their annual budget as needed.
Best Practices for Nonprofit Budgeting
Nonprofits should consider these factors when undertaking their 2021 budgeting process:
- Although 2020 has been an unusual year, you can look back to historical data over the past five years for spending and revenue trends that will help you determine baseline figures for next year.
- Begin with a review of your current operations and staffing levels. If current operations are projected to continue next year, determine if associated staffing levels will continue as well.
- If your organization obtained Payroll Protection Program (PPP) loans for payroll and operating expenses, be sure to include any unspent loan amounts as budgeted revenue to the extent that the loan is expected to be forgiven.
- Personnel costs (salaries and benefits) are usually the largest expense item in a budget. If your organization had to furlough or lay off staff in 2020, consider whether some or all of those employees will be hired back.
- Be conservative with your expense budget and plan for the worst-case scenario. If 2020 has taught us anything, it’s that the world can change quite suddenly.
- Review your 2020 actual expenses to-date to see which items will continue, which will end and which may increase next year. If some services were cut this year but could resume at some point in 2021, factor those costs into next year’s budget.
- Plan to monitor your cash position carefully throughout the year. Establish a point when you may need to dip into unrestricted reserves to cover operating expenses.
- Discuss sources of revenue with your fundraising team and note changes that occurred in 2020. Look separately at grants, large donations, revenue from fundraising events and other sources of income. Note which gifts may have restrictions that limit their availability to cover operations.
- Separate committed gifts and revenue from those sources that have greater uncertainty. You may be able to reinstate some fundraising activities but not others. Ask your accountant to help you perform a sensitivity analysis on uncommitted revenue to ascertain the likelihood of obtaining these funds.
- If your organization had to defer special events in 2020, factor in any deferred sponsorship funds and ticket sales that will be honored at rescheduled events in 2021.
- While it may be tempting to cut capital projects to balance your budget, such as construction of a new facility, consider the long-term ramifications of doing so. You may be able to obtain special grants or matching donations to fund these projects.
- If your organization’s mission has changed, you may need to allocate additional funds for marketing and fundraising to communicate your new direction to donors, partners, constituents and the community.
- Consider developing a few different budget scenarios to review with your board. You can assign probabilities to these scenarios to account for the likelihood of revenue shortfalls and expense increases.
- You may wish to invest in new software to help you easily reforecast your budget throughout the year. This will enable you and your board to react quickly to sudden changes in revenue and expenses.
Developing and following a sound annual budgeting process is a critical responsibility of nonprofit management teams and boards. Your accounting firm can provide insight and advice for planning your 2021 budget during this challenging time.
Please contact DMJ & Co., PLLC to discuss this further.