Budget Creation after or during Disaster

The COVID-19 pandemic has left many nonprofits in a quandary. How do we budget for next year? Creating a bottom-up budget would not be a responsible means of budget creation because costs that are usually fixed, such as rent and utilities, fluctuated in FY2019-2020. Examining this year’s variable costs — or the costs that depend upon how many people the organization serves — doesn’t look to what the real needs of best serving the mission will be next year. Many human service organizations made do with less. Some shut down operations. Organizations outside of human services, such as environmental protection and arts and culture, lost funding. Compound this with the inability to produce fundraising events, and the situation seems to dictate creating a budget that assumes the organization is in its infancy.

Nonprofits do not budget in the same way that publicly-traded and closely-held organizations do. These companies predict sales and use that data to make assumptions about the cost of doing business. Nonprofits look at expenses and then estimate what money they can raise and earn. This goes to the heart of what a nonprofit is, an organization that puts clients first.

Many nonprofits have struggled to educate new board members to accept this order of operations. It is the right way to budget, but with fundraising and client participation in flux, nonprofits must decide whether to follow the traditional model in the next fiscal year or use a different model.

The traditional model considers how many clients a nonprofit serves and what the cost to serve a client is. This data creates fluctuations in a nonprofit’s income statement. The choice before nonprofits is whether to put the client second and study who will fund the organization and by how much. July is approaching fast, and I recommend creating an interim budget for the next quarter.

Data must fuel the creation of the FY2020 budget. Using a 5-year weighted moving average projection will allow some cushion in determining a reasonable FY2020 budget. The weighted moving average is sensitive to the last data point prior to the estimate or budget. 5-year simple moving averages and 10-year regression analysis see all data as equal. Advanced regression would need to account for the 2008 market crash and particular economic indicators. Nonprofits can perform a weighted moving average analysis with an online tool such as https://www.rapidtables.com/calc/math/weighted-average-calculator.html.  

In this example of the simple moving average calculation and the weighted moving average calculation, I used the following data: Year 1 = $10.00, Year 2 = $10.00, Year 3 = $10.00, Year 4 = $9.00, and Year 5 = $7.00.

When I calculated the budget for year 6 and used the simple moving average method, the budget number was $9.20. When I used the weighted moving average method, the year 6 budget number was $8.73. The weighted moving average puts more weight on recent events and yields a less aggressive goal.

For an interim FY202 budget, I cannot overstress how much I advise nonprofits to use a weighted average to determine each line item in your income. From there, the agency can make decisions about program, staff, space, outreach, marketing, etc. expenses. Nonprofits should not use the income-driven budget model forever. It has legitimate flaws. When an organization estimates income first, the institution cannot account for the number of clients served and the accompanying expenses. The agency cannot drive the budget based on client growth or plateau. Though, for now, rather than coming in short on serving a community, it is safer for the nonprofit to project what is possible regarding income (and thus service) as opposed to plans to serve an existing or increasing client base.