Nonprofit Budgeting in Uncertain Times

Beyond Compliance: The Purpose of Nonprofit Budgeting

When the authors ask nonprofit leaders why they budget, they will often say the following: to set targets, align spending with strategy, and satisfy funder or regulatory requirements. Those answers are correct, but they understate the role a well-designed budget can play in day-to-day management. When approached thoughtfully, budgeting becomes an exercise in translating strategy into financial terms, clarifying assumptions, and supporting informed decision-making across the organization. A robust budget process does the following six things especially well:

• Turns Priorities into Numbers. A budget is a financial interpretation of the operating plan. A strong budgeting process puts dollars to strategic priorities—it illustrates the organization’s priorities and tradeoffs.
• Provides a Framework for Informed Decision-Making. The budget becomes the roadmap that leaders follow, making choices clearer and ensuring alignment with the organization’s goals.
• Surfaces Funding Gaps and Liquidity Challenges. Paired with a cash forecast, the budget facilitates early detection of periods where receivables lag or expenses outpace inflows.
• Builds Credibility with External Stakeholders. Transparent planning strengthens conversations with funders, bankers, and partners.
• Enables Disciplined Monitoring. The approved budget becomes the benchmark for monthly budget-to-actual reporting, which enables leaders to ask the right questions and take informed action.
• Drives Engagement Across Functions. The best budgets are built and managed cross-functionally, with program and development staff estimating activity levels, direct costs, and revenue assumptions, and then owning these figures.

This last point bears emphasis. The finance department may be the budget’s gatekeeper, but it cannot operate in a silo. Program and development hold critical information and must be involved in the budget process. In practice, that means clarifying roles at the outset:

• Finance compiles the model, vets assumptions, and drives monthly budget-to-actual reporting and analysis.
• Program leads estimate service levels and direct program costs and revenues and manage the plan once approved.
• Development forecasts fundraising income and expenses, including grant cycles, pledges, appeals, and events, and then updates projections throughout the year.
• Executive leadership oversees the budget process, sets strategy (e.g., program starts/expansions/cuts, personnel decisions, and investments), and adjudicates tradeoffs, then reviews monthly reports and recommends actions post-approval.
• The board/finance committee sets policies (e.g., operating reserves, endowment spending, liquidity management, and revenue diversification), approves the final plan, and monitors deviations.

Well-defined responsibilities lead to better budgets by fostering collaboration, buy-in, and accountability.

Short- and Long-Term Tools—and How They Connect

Nonprofits commonly focus on their annual operating budget, but there are several types of budgets that can support both the short- and long-term goals of a nonprofit.

Short-term budget tools. The operating budget covers revenues and expenses for the fiscal year, typically on an accrual basis. Two words define a strong operating budget: realistic and benchmark. Set goals that are defensible. Once the board approves it, the budget becomes the approved plan for monthly variance analysis and course corrections. The operating budget remains unchanged for the remainder of the year. There are few scenarios that warrant a formal “rebudgeting.” Instead, use a forecast to reflect emerging realities.

If the operating budget serves as a roadmap, the cash forecast is like a traffic report: it keeps leadership informed about real-time conditions so they can adjust the route and timing as needed. Accrual activity is translated into monthly cash inflows/outflows, incorporating timing of grant receipts, pledges, reimbursements, payroll cycles, debt service, and capital payments. This rolling view provides a clear visual indication of when to draw a line of credit, defer expenses, accelerate billing, or draw on investments. In the authors’ experience, executives often consider it their most valuable management report.

Project or grant budgets are typically prepared in conjunction with funding requests. These budgets show the spending plan for a particular funded initiative or significant project, and they feed into the operating budget when the project or award is approved. Project budgets assemble all of the information needed to track the project as a whole, so the period for a project budget may or may not correspond to the organization’s fiscal year.

Long-term budget tools. A capital budget plans for the acquisition, improvement, or replacement of land, buildings, and equipment. These budgets often span multiple years and may be connected to a capital campaign. While capital expenditures do not belong in the operating budget, their operating consequences do: maintenance, insurance, depreciation, and interest expense (if financed). Factoring in these costs is critical for organizations considering fixed- or long-term asset purchases.

A strategic or master plan maps out long-term goals and the actions required to meet them. Strategic plans typically present high-level revenue and expense items associated with the organization’s strategy in less detail than an operating budget. Though the strategic plan can span any length of time, three to five years is typical.

Driving Factors in the Current Landscape

Budgeting and forecasting decisions are influenced by a combination of external and internal challenges. Although each organization’s operating environment is unique, many nonprofits face similar conditions. Organizations can reduce the impact of internal challenges through thoughtful budgeting, planning, and policy design. While external challenges may be beyond an organization’s control, they do have the ability to choose how they respond.

External drivers. While it may at times feel like there is an unlimited number of external challenges facing the industry today, four stand out:

• Economic Uncertainty. Inflation continues to drive up the cost of labor, program operations, and insurance, while current market volatility affects endowment and investment returns. At the same time, a challenging labor market has made recruiting and retention more difficult.
• Funder Volatility. The reliability and stability of federal funding has fallen greatly during the past year, while the familiar lag in state and local payments has strained liquidity. Foundations are struggling to find the right response, with some shifting their focus areas to offset cuts (such as public broadcasting) while others are investing more deeply in current grantees (excluding new applicants).
• Social and Demographic Change. Community needs and expectations are shifting; some programs have seen surges (like food banks) while others are seeing lower demand (like performing arts). At the same time, advances in technology—including artificial intelligence and automation—are reshaping how organizations function. Many nonprofits that have served as major employers within their local economies, are still assessing how these technological tools can be integrated responsibly into their operations.
• Public Policy. New and evolving regulations require nonprofits to remain vigilant and adaptable, as compliance demands can shift quickly, and changes to the tax law can influence donor behavior.

Internal Drivers

While internal challenges differ from one organization to another, in recent years many nonprofits have consistently encountered the following:

• Governance and Leadership Gaps. Turnover in leadership roles (e.g., executive director/CEO, CFO, development) has increased recently, as many executives are ready for a change following years of uncertainty (see, e.g., Kittleman Search, https://tinyurl.com/2p6n7k4v). Additionally, nonprofits have long suffered from low board engagement in strategy and/or fundraising.
• Unpredictable Revenue Streams. Uncertainty can stem from concentration risk due to heavy reliance on a single funder or funding stream, difficulty projecting earned revenue, and unpredictable timing of funder reimbursements.
• Limited Capacity. Insufficient accounting capacity and in-house financial expertise, rooted in the persistence of the “overhead myth,” has led organizations to underfund finance departments and postpone necessary investments in accounting systems, emerging technologies, and processes essential for managing cash flow. Furthermore, the lack of sufficient general operating support intensifies this issue.
• Insufficient Operating Reserves. Failing to build reserves through planning (i.e., surplus budgeting), sometimes stems from a board’s misconception of the term “nonprofit”—nonprofits can have, and plan for, surpluses. In addition, challenging times can create pressure on nonprofits to utilize their reserves to spend more in support of their communities, without a plan to replenish such reserves later.

Budgeting decisions must respond to these internal and external drivers. This often includes setting diversification targets, investing in technology or capacity, and adopting board-approved financial policies. Exhibit 1 illustrates how these decisions can align with an organization’s unique challenges.

Scenario Planning: Developing Contingency Strategies

While the annual operating budget and forecast each focus on a single, most likely scenario, uncertain times require nonprofit leaders to think beyond one outcome and prepare readymade “if-then” strategies. This is the purpose of scenario planning: a structured approach to consider alternative futures, quantify their impacts, and plan responses in advance. Just as many prepare for unexpected events at home, organizations can proactively plan for uncertainty by identifying potential challenges and mapping out how they will respond.

One of the first things to consider when implementing a scenario plan is the time horizon. Typically, a short-term time horizon (one analyzing 3, 6, or 12 months) is preferable when dealing with uncertainty. It allows an organization to focus on their response to the external and internal drivers mentioned above. On the other hand, a long-term time horizon (analyzing 18 months, 3 years, or 5 years) works better when an organization wants to focus on recovery or the future impact of the changes it is currently experiencing.

After deciding on a time horizon, organizations will gather the following items:

• Budget or Forecast. Use the organization’s current-year budget or forecast as a baseline.
• Projected Revenues and Expenses. Keeping the selected time horizon in mind, determine the projected revenues that will be earned and projected expenses that will be spent over that time period.
• Stakeholder Input. Similar to the budget and forecast, obtain input from the necessary stakeholders, like development, program leaders, and management, as well as external parties, such as grant officers, when relevant.

Once these pieces of information are identified and gathered, scenario plans can be built. The authors recommend that nonprofits come up with a minimum of three separate scenarios, each with its own set of assumptions. The scenario plans used as examples in Exhibit 2 are optimistic, realistic, and least favorable.

Step 1: Define scenarios and assumptions. When creating scenarios, it is helpful to document the unique set of assumptions that apply to each. Not only will the assumptions serve as a guide to the staff preparing the scenarios, but they also ensure all users are on the same page. An example is shown in Exhibit 2.

Step 2: Analyze how assumptions affect line items. Decisions can feel complex and difficult during uncertain times. It can be helpful to zoom out and consider that there are four primary actions a nonprofit can take to manage through projected budget shortfalls:

• Spend Less. Examples include cutting programs or reducing staff.
• Spend Differently. Invest in marketing or fundraising staff with the aim of increasing revenue and pursuing new programs.
• Raise Differently. Diversify revenue and reduce reliance on uncertain revenue sources.
• Raise More. Look at one or more sources.

With a focus on these controllable levers in mind, the following are examples of specific questions nonprofits should ask themselves to identify how the assumptions impact their corresponding revenue or expense line items:

• Contributed Revenue. Which grants, sponsorships, or donor categories are at risk? What is the realistic replacement rate and timing?
• Earned Revenue. What line items are in jeopardy (e.g., program service fees, membership dues, subscriptions)? Are there opportunities for new earned revenue streams?
• Reserves and Credit. Are there board-designated funds available to bridge the gap? How much can be drawn from reserves under the current policy? How will reserves be rebuilt? Is a line of credit in place, and is it the right size? What debt service costs need to be factored in?
• Program Expenses. What variable costs rise or fall as programs scale up or down? If an entire program is cut, how might indirect costs need to be reallocated? Are there opportunities for in-kind donations to cover program costs?
• General and Administrative Expenses. Which fixed costs cannot be reduced or cut? What can be negotiated (e.g., payment schedules, vendor concessions or discounts, scope changes, resource-sharing arrangements)? Are there one-time costs to reduce or exit a contracted expense (e.g., attorney fees, lease termination penalties)?

It is important to resist magical thinking. Nonprofit staff are often optimists at heart, but this is a moment when the finance team needs to be realistic, or even pessimistic, particularly with respect to the least favorable scenario. Do not assume that an untested fundraising event or new appeal or grant application will fill in any gap. Taking off any rose-colored glasses will make the organization stronger by preparing for the worst, while hoping for the best.

Step 3: Create cash forecasts and action plans. Creating a cash forecast for each scenario can help management identify points where cash falls short or drops below the organization’s liquidity threshold (e.g., 60 days of cash on hand). Create an action plan for each scenario and assign responsibilities, deadlines, and key performance indicators (KPIs) to monitor. An example is shown in Exhibit 3.

Exhibit 3 shows how a nonprofit can distribute responsibilities so that no individual is over-extended while the organization implements several strategies simultaneously. This approach not only balances the workload, but it also enhances the overall likelihood of meeting their goals. Nonprofits can benefit from creating dashboards for management to monitor progress on assigned actions and KPIs monthly, alongside financials.

Scenario planning enables nonprofits to manage uncertainty proactively—with prompt, pre decided actions, not ad hoc firefighting.

Best Practices for Financial Resilience

Nonprofits that thrive in uncertain times apply the following habits:

• Design the operating budget to support short- and long-term strategic goals.
• Create and regularly update cash forecasts that inform near term actions.
• Manage risk with scenario planning to prepare for the unexpected.
• Use real-time financial monitoring to identify budget variances and make timely course corrections.
• Align board-level financial policies with operational realities.
• Bring departments together to shape financial plans and distribute ownership to promote accountability for implementation and monitoring.

Accountants and finance leaders are uniquely positioned to anchor these best practices. By pairing rigorous and thoughtful planning with pragmatic contingency design, nonprofit organizations can acquire the tools to monitor financial data in real time and make confident, timely, decisions in service of their missions, whatever the future brings.