There's A Hole in Your Budget
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Financial Sustainability
There's A Hole in Your Budget
When it comes to your budget there are two types of numbers that are critical. If you’re like most nonprofits, your budget is most likely missing the most important of the two. Let's talk about some key factors that will change conversations around money at your organization.
We all know money isn’t everything.
We’re nonprofit professionals after all!
But it sure does help.
And without a reliable budget, your nonprofit will not be financially stable or have long-term viability.
So let’s talk about your budget and two types of numbers that may be missing that are going to change the way you have conversations around money at your organization.
1. Let's talk pie
Nonprofits make two types of pie: mission pie and money pie. Every nonprofit is always making both, hopefully in the right proportions.
Everyone wants to have more mission pie...better programs, more activities, bigger impact. If you didn’t you wouldn’t be a nonprofit.
But in order to make mission pie, we have to make money pie. And that’s where your budget comes in.
How you write your budget can really change the conversation you’re having around spending and ultimately how much money your nonprofit raises.
So, how can we get that money pie?
2. Bottom line budget
Here's a simplified version of what often happens at nonprofit budget meetings.
We write our budgets.
We list the income.
We list the expenses.
We tally up the difference.
Then we look right at the bottom line and if it's negative, we freak out and start having this conversation… "we need to cut the budget.”
The reason why this happens is that we often only see our budget through the lense of income, expenses, and the bottom line. That ends up being the only conversation we CAN have.
The real reason why we get stuck having this conversation is because there's a hole in your budget.
Much like the song "There's a Hole in the Bucket," you're experiencing a circular problem. Because of this hole, you have less money pie.
If we change the conversation and listen to what our budget is trying to tell us, we can change how much money pie we have in the budget. More on listening to your budget here.
3. The hole in your budget
So what is this hole?
Well, there are actually two things you're probably missing or at least one of them you might have in another location. These are direct expenses and percentages.
Let's take a look at this in a budget.
I've added in some direct expenses and percentages here in these yellow columns.
We know that we're bringing in $284,849, the direct expenses are a little over $199,000, and then 30% is left over from the amount we started with. 30% of the money pie that came in is left over to pay the operating expenses. Then we look at the very bottom, that's $2,251 left over.
That's negative .88% of the total money pie came in.
Now, that's still not good, but all of a sudden, I'm not so focused on the negative $2,000 like I was before. I'm starting to think about some other questions that I might ask other than just crying out, "we need to cut the budget!"
4. Budget leftovers
What other questions might we be asking as we talk about how much pie is left over compared to how much pie came in?
Or another way of framing the question is, how good are you at having money pie leftover?
We look at the bottom line and it's negative, but that's not the only thing you’re looking at anymore. Now, you’re asking yourself (because you have these other numbers to focus on) how much money pie came in AND how good are you at having money pie left over.
Now, I want to take it a step farther and show you how far this conversation can go.
4.1. Change the conversation
Let’s look at this image again. Which program is better at making money? Program A or program B?
Program B is better at making money and so that leads me to two potential conversations around the budget.
Instead of worrying about cutting the budget, I’m going to consider how we can make program A as successful as program B. That's a meaningful conversation we could have.
Or another conversation is to consider how we can do more of program B since it’s doing so well. How can we actually invest in program B since it’s really good at making money pie?
Maybe in this case program B is our fundraising program. We absolutely want to increase the direct expenses for that so that we can have more money pie coming in.
You see how this conversation now is totally different. We're not even thinking about cutting expenses, we're talking about what we can do to make more money pie and usually that can involve spending more, but it can also involve changing something about how you work.
5. Manage your finances differently
So what are the kinds of things that you can change? I like to break these up into the ingredients and the process.
5.1. Ingredients
Your ingredients are things that you spend money on that pay for themselves, and then some.
This is where your income generating expenses come in, often including marketing expenses, fundraising expenses, development staff.
This is where spending more money will make more money pie.
5.2. Process
The other thing you can change is your process. These are your tools, your method of making money pie, and your scalability. This is your recipe.
Organizations often host some sort of big fundraising event, like a gala to make money pie. The problem with these events is they don't leave that much money pie leftover compared to how much money pie went in. And they're not scalable. You can get them to a certain size and then you can't get them any bigger.
If you change your method, or your recipe, you can potentially make even more money pie with the same amount of ingredients.
Maybe you need different tools. To go along with the baking metaphor, maybe a bigger mixer. If you're making one pie at a time, you're only going to make so many pies in a day. You’ve got to start baking in bulk in order to scale your ability to make money pie.
6. Final thoughts
When we have more money, we can make a bigger impact. But remember, don't just spend your money pie on making an impact. We always want to make sure that some of our money pie is also going into making more money pie, so we have vibrant, sustainable organizations.
Click here to get access to my free nonprofit budget template.
If you’d like to talk more about budgeting for nonprofits, apply for a call with me.
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Apply to work with Sarah directly