Nonprofit Budgeting with Wild Cards

How can a nonprofit build a budget amid so much uncertainty?  Budgeting always involves wild cards, but Coronavirus has multiplied them by 19.

A colleague reached out to me about this the other day. Here’s how I advised him to play the cards he got dealt.

"Life is full of surprises, but the biggest one of all is learning what it takes to handle them."

~ Deborah Wiles

 Budgeting is rarely a cake walk

Even during good years, few small to medium-sized nonprofits have enough revenue certainty to make budgeting easy.  Will the XYZ grant renew?  Will our annual gala perform as well as last year with a new development director at the helm?  How many new major donors will commit?

Unless your nonprofit has deep reserves, budget season can leave you reaching for the aspirin or something stronger.

Coronavirus created extra uncertainty

Now many things we took for granted have become unpredictable. 

·       Will donors still give at the same rates? 

·       What if staff members become sick? 

·       How can staff remain productive if they have to care for their little children who got sent home from school and daycare? 

·       Can we even hold our annual gala? 

·       How do we serve clients safely?

This makes planning much harder, doesn’t it?

Coronavirus ramped up anxiety too

Not only do you have to manage all the uncertainty, but you also have to manage people’s anxiety:

·       Perhaps your board is asking 19 times more questions than before, about all sorts of minutia.

·       Your team and other coworkers you count on during the budget process have extra stress because they’re juggling kids at home, or they’re having a hard time adjusting to so much social isolation, and of course they’re worried about the people you serve.

·       All of that on top of your own personal worries.

For most humans, as our stress and anxiety go up, our ability to focus and plan go down.  So budgeting becomes that much harder.

Building your budget(s) to account for the wildcards

Yes.  Budgets plural.  This will require a little more work on the front end but make your life much easier when you go to present it to your board.

If you’re fortunate enough to only have a few wildcards, then two budgets should do the trick:

1.       The wildcards don’t work in your favor.  (AKA worst case scenario).  In this one, you’ll show how the organization makes the best of a bad situation.  It might involve layoffs, a reduction in hours, closing a program, hitting pause on a new initiative, etc. 

2.       The wildcards work in your favor (AKA best case scenario).  Whatever those few wildcards are, this is where you assume they work out great. 

If your organization has lots of wildcards, I recommend you add a third budget:

3.       The most likely scenario.  You’ll have to make some educated guesses based on imperfect information.  If nothing else, you split the difference between best and worse and show how you would allocate your expenses in that category.

If the wildcards don’t have lots of complexity, then you may not need to build each budget out fully.  In that case, you might instead substitute a short narrative like this:  “If Grant A doesn’t come in, we will offset the loss in revenue by closing the XYZ program and laying off its staff.  The rest of the organization can continue forward without any additional changes.”

How to make the hard decision of what might get cut

Yes.  This is the part of budgeting that sucks even during normal years.  Its harder now.  And you’ve been putting off for years doing anything that indicates that some programs or staff are favored over others. 

Fortunately, many options exist to help make this less painful.  Here are a couple of my favorites.

One:  You engage a neutral third party to bring clarity and a certain level of objectivity to the process.  If some people dislike the final decision, their frustration can get directed at the third party rather than at internal leadership.

Another favorite:  a matrix map.  This simple tool can bring clarity to difficult decisions.  Just as importantly, it can help you have a constructive, more objective conversation with stakeholders about the difficult decisions you’ve made.   Here’s a quick video I’ve put together to explain how it works.

Building support for the budget

Doing this well can take as much time as actually creating the budget itself.  If you don’t do this carefully, it can take up even more time in the long run because key constituents will not have confidence in the budget.

1.       Engage key staff early.  They’re going to need extra time this year.  They may especially need support embracing the unknown.  Many will have trepidation about being held accountable for factors they cannot reasonably know yet.  It will help to clarify for them that they will only be responsible for things under their control.

2.       Engage your treasurer and finance committee early.  When the board finally votes on the budget, you want them on your side and encouraging the rest of the board to vote in favor of the budget.  You want to get them to a place where they can confidently say, “we’ve kicked the tires on this over and over and looked under every stone for more funding.  The staff has done a great job putting this together.  This truly represents the best we can do under the circumstances.”

3.       Plan for contingencies.  The three budget scenarios, above, form a key part of this strategy.  Your board will want to know you’ve thought through the “what ifs.”  And its going to help you react in a timely way when one or two surprises happen (as they inevitably do).

4.       A thorough presentation to the board.  Many of your board members will feel higher anxiety at budget time this year.  Most haven’t been by your side as you’ve built the budget.  If you want to move them from panic to calm, you’ll need to thoroughly present your thought process to them and demonstrate, step by step, how you have looked under every stone and kicked the tires over and over.  This means presenting slides, not just a spreadsheet.  Walk them through it in a language that they will all understand:  jargon free, more graphs than numbers, the contingencies you’ve thought through, how you’ve looked for money even under the sofa cushions, etc.