Budget Projections: The Most Wonderful Time of The Year

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Oct 17

Ali Marcus

Budget Projections: The Most Wonderful Time of The Year

by Ali Marcus

It’s October – time for the World Series, pumpkin-flavored everything, and ridiculous pop-culture meme-themed Halloween costumes. It’s also time for something far more frightening: the annual budget process for any nonprofit on a calendar-aligned fiscal year. 

The budgeting process tends to come with a lot of tsuris - an apt Yiddish word that encompasses the whole spectrum of woe, suffering, and grief. If you’re a Development Director or an Executive Director, right now you’re trying to answer the seemingly unanswerable question: How much money will you raise next year? The year after that? Where will it all come from?

Budget projections are complex. The expense side is a constant moving target involving considerations about programming choices, staff fluctuations, infrastructure needs and changes, and the best one of all – unknowable but inevitable shifts in any or multiple of these categories. On the revenue side, it feels simpler: Backfill the income gaps with individual giving and grants, and we’ll figure it out. Right?

Wrong. Unfortunately, this approach can do more harm than good – and can lead to greater turnover in your development department.

Many organizations make the mistake of letting programs dominate the budget conversation, and budget solely based on expenses and the need to show the board that the budget is balanced. They allow the financial needs of program growth or change to overrule the goals development submits as a reflection of the potential of the donor base.

This is not to say that organizations shouldn’t be ambitious in setting stretch goals for fundraising each year. But leadership needs to support an analytical process for setting expense budgets and contribution goals that trusts the professionally informed judgments of their fundraising staff. When development staff are not allowed to advocate for informed goals from their own understanding of what their donors and funders can produce, the most talented generally will leave before they fail to meet their unrealistic goals.

Effective leadership of the budget process is crucial to effective leadership overall. These numbers are just a tool, and they will shift around, but nevertheless the creation of the budget brings your organization together in a way that builds a shared understanding of the work your team has committed to, and a shared desire to achieve the goals within. The budget is a values statement – a living, breathing representation of your priorities.

So - how do we predict contributed revenue? This process is crucial, because it empowers your fundraising team to participate in the goal-setting process, and to collaboratively set expectations of the work planned for the coming year. Because the core of your operations relies on fundraising, it behooves you to focus on the investment, encouragement, and engagement of your fundraising team as much as your program team.

Projecting Grant Revenue: by Ali Marcus, Director of Grant Programs

  1. Identify and remove the outliers. Everyone loves that annual LOI to the Washington Women’s Foundation, or even more of an outlier, the core support grants offered by the Satterberg Foundation. And everyone who remotely qualifies for these opportunities should be considering an annual application. However, the $100,000 or $300,000 (respectively) that would be in the pipeline are true long shots, even for the most qualified and well-matched proposal. These two opportunities are well known examples of highly competitive, large, multi-year grants, but there are always others. Take stock of your grant pipeline and remove the ones that are large enough (and unlikely enough) to skew your projections.
     
  2. Once the outliers are removed, add up all remaining planned requests for a fiscal year. This means noting the expected receipt date of a grant – not just the submission date. You want the total amount of funds you plan to request and receive within the fiscal year in question. It’s important to calibrate the request amounts for these planned submissions realistically, and to make sure they reflect your history with that funder.
     
  3. Divide this number by three. The number you are left with is the amount to project in your budget for the upcoming fiscal year.

This method is predicated on one of the best practices we advise our clients to follow: applying for three times as much grant funding as you need. We recommend this for all grant-seeking organizations, no matter the size of their operation. It ensures an active and consistent grant activity appropriate to the size of your need, and it allows time for cultivation opportunities with new foundations that need space to develop into strong partnerships.

Projecting Individual Giving Revenue: by Ariel Glassman, Senior Consultant

  1. Pull and review the previous three fiscal years’ worth of contributed income actuals – separating each out by category or revenue mechanism (major gifts, events, etc). Just like you did for grants, identify the outliers in each category – large gifts that were given as challenge matches or for specific, time-based purposes; or gifts that for other similar reasons, can’t reasonably be expected in next year’s results.
     
  2. Remove these outliers and calculate the 3-year average for each contributed income revenue line. For events with auction elements, it can be useful to look at the average ticket sales, raise-the-paddle contributions, and auction item totals and yields, not just a comprehensive event average. Make sure that major gifts calculations reflect the spread of multi-year pledges across different fiscal years, and don’t double count (or discount!) that revenue.
     
  3. Look at the development plan for next fiscal year (which should be in progress or complete by the time the budget is finalized) and reflect on how intended changes in the activities or capacity of the team could reasonably impact the 3-year average in each category. Make adjustments up or down depending on this analysis. These figures are your projected goals in each area of contributed income in the upcoming budget cycle. 

This method ensures that long-time patterns and trends your donor base exhibits, and new assumptions and opportunities, are all reflected in the budget and department goals. We encourage organizations to set stretch fundraising goals outside of their official budgets – that can really motivate staff, while ensuring that they’re not living in an unrealistic pressure cooker.

In general we recommend that nonprofits should not budget for more than 3-5% growth in contributed income year-over-year without making additional investments in development capacity, or taking something else off of development’s plate to make way for more effective activities. Budget increases higher than 3-5% annually should only be made after examination of the specific prospects in the development stream that could support that increase, and program opportunities that can be better leveraged to build relationships with donors; as well as a commitment from the board to help bring new prospects in to meet these goals.

Following these steps should relieve some of your budgeting stress this fall, and set up your next fiscal year to succeed!



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