Budgeting, like many other things, was generally easier before COVID-19. Even though the pandemic isn’t over and much remains uncertain, nonprofits need to plan their financial needs and project financial resources. But you might be able to make the budgeting process more effective by trying a new approach — for example, a rolling budget — or by reforecasting an existing budget.
Roll with it
Most nonprofits historically have relied on static budgets that are developed in advance of each fiscal year and are based on estimated activity. But static budgets generally are less useful in turbulent times.
Rolling budgets are more flexible. Rather than leaving a budget in place for the year, organizations with rolling budgets set periodic dates to readjust the numbers. For example, you might budget four quarters ahead. At the end of each quarter, you would update the budgets for the next three quarters and add a new fourth quarter.
The rolling approach anticipates changes and encourages your organization’s leaders to take a forward-looking perspective. It works well for nonprofits dealing with shifting ground and evolving strategies. Plus, it provides more useful information for decision-making than a backward-looking static budget.
A more dramatic fix
Some nonprofits may require an even more dramatic budget fix. Reforecasting the entire budget could boost your nonprofit’s odds of survival in tough times. It generally makes sense if you’ve undergone a major change that has implications for overall operations, such as securing or losing a large grant. Reforecasting also typically makes sense if it becomes clear your existing budget is materially inaccurate.
This process begins by determining costs and revenues that are variable (for example, supplies and program revenue) and the effect that a trigger event might have on them. In the case of an event as far-reaching as the pandemic, you also might find that fixed expenses like payroll or rent are affected. You’ll need to reforecast any of these items that are likely to differ substantially from original estimates.
You may find it worthwhile to apply budget modeling, considering different scenarios. For instance, what would happen if a major revenue source was cut by half? Or if it disappeared altogether? Would you seek a loan, cancel a capital project or trim staff? The final reforecasted budget is a fully revised document, not simply a handful of line item adjustments.
Stay on top of it
Now might not be your nonprofit’s budget season, but you still need to keep a close eye on your budget. As pandemic-related events and other catastrophic changes affect your organization’s funding and expenditures, review and adjust your budget. Whatever your current financial situation, our Nonprofit team can help.
For more information on nonprofits, visit irs.gov.