A Revenue Aligned Budget is the Safe Way to Go

I feel the time is right to stretch our budget planning and begin to envision operations from the perspective of a balanced budget aligned to a conservative estimate of revenue and funding for the next 12 months. I am now advocating for using a “revenue aligned budget” strategy that is realistic in nature, obtainable, with low risk and a high degree for success.

This past year has been an unpredictable time for most nonprofit organizations. Early in 2020 the impact on operations and funding was lightning quick, forcing nonprofits to swiftly adjust to remote working, lower capacity, funding disruptions, and program delays, reformatting, and sometimes outright cancellations. For these reasons, I advocated early in the year to switch to rolling 3-month budget re-forecasts to be nimble enough to deal with constant change while protecting financial health and continuity.

As we approach the end of 2020, we are all still expecting a relatively high degree of volatility. However, we now have a better sense of the impact on operations and funding from nine months of experience. With this knowledge in mind, I am now leaning towards lengthening our budget outlook to one year. This can be done conservatively using a revenue aligned (or “top-down”) budget strategy driven by expected funding levels that are solid and reliable, as we discussed in our article “Planning for the Next Annual Budget Cycle: Where Do You Start?”

Now comes the tough part: aligning programs to funding. You need to understand that this is a difficult balancing act. If you are getting less funding and this funding is over-weighted towards programs that have not been considered core to your mission, this could materially shift your budget in a direction that may not be acceptable to your Board, donors, members, grantors, or service recipients. I see this the most with smaller organizations funded by major donors (large-dollar gifts) and grants.

As detailed in “Planning for the Next Annual Budget Cycle: Where Do You Start?,” the first step is to stress test your revenue and funding base to determine the total funding on which you can conservatively rely for next year. Next, determine what portion of this funding base is restricted or has inherited “soft promises” to be spent only for specific purposes. Lastly, prepare a first draft of the portion of the budget that lines-up with these restricted/committed funds and see how far this would shift your traditional delivery of mission, programs and services from the past.

During these times, some shift is expected. How much shift will work and be acceptable? That is the question to tackle with a revenue aligned budget. Often times the shift is not that large and makes sense based on what is taking place now. If this is the case, move forward, communicate the shift in programs and services, and include an assurance that as economic conditions and funding support improves, programs and services that were curtailed will be reinstated on a real-time basis.

If the shift is large and may not be acceptable to your Board and funders, you will need to proactively begin a lobbying process before presenting the budget for consideration and acceptance. Explain that funding for the next year has changed from the past. Look for areas of compromise. Get your Board and funders involved in exploring temporary solutions that makes sense for the next year. Explain that, in the short-term, protecting infrastructure, staffing and financial health is a higher priority because this will enable the organization to ramp back up as funding returns.

Planning Tip – For two reasons, it is best to start the communications regarding a budget shift with the finance committee. First this signals that there is a strong financial driver behind the shift. Second, the treasurer can be a real partner in explaining the shift in programs and services, and a key point person for problem solving, exploring solutions with funders, and leading compromise discussions that will ultimately be acceptable for final budget approval. 

It is still very difficult to prepare a new budget for the coming year. There are a lot of unknowns ahead. However, we recognize that we all learned a lot from navigating through 2020. With this knowledge and a revenue aligned budget strategy, we can safely lay out a path that protects financial health by leaning on solid sources of revenue and eliminating deficits.