In this webinar, Stephanie Skryzowski will review the methodology and mindset around budgeting, five common mistakes to avoid, how to break down silos and create an inclusive budget process, how to analyze and communicate your budget, and how to strengthen your budget’s impact through forecasting and cash flow management.
Steven: All right. Stephanie, I got 2:00 Eastern. Is it okay if I go ahead and get this party started?
Stephanie: Yes. Let’s roll.
Steven: All right. Awesome. Well, good afternoon, everybody. Good morning, if you’re out on the West Coast, I should say. If you’re watching the recording, no matter where you are, I hope you’re having a good day. We’re going to have some fun. We’re going to talk about nonprofit budgeting, how to build your roadmap to growth and impact. I’m Steven. I’m over here at Bloomerang, and I’ll be moderating today’s discussion as always. And just a couple of quick housekeeping items, just want to let you know we are recording this session and I’ll be sending out the slides as well as the recording later on today. You should already have the slides. I sent those out about an hour ago, but if you missed them, don’t worry. We’ll get you everything later on today. You won’t miss a thing.
But most importantly, we’d love to hear from you. Please use that chat box right there on your webinar screen. We’re going to save some time at the end for Q&A. So don’t be shy. There’s a chat box, there’s a Q&A box. Use either of them. That’s okay. We’ll look at both of them for questions. You can also send us a tweet. We’ll keep an eye on the Twitter feed as well. But we’d love to hear from you, especially during the Q&A time.
If this is your first Bloomerang webinar, just want to say an extra special welcome to all you folks. We do these webinars, actually, I was telling Stephanie a couple of times a week now. We love doing these webinars, bring on a great guest. Today is no exception. They’re always free, always educational. But what Bloomerang is, if you’ve never heard of Bloomerang, just for context, we are a provider of donor management software. So check that out if you’re interested, if maybe you’re looking for new software in the coming year, visit our website, we got all kinds of videos you can watch and learn more about us. But don’t do that right now because we have a very special guest today joining us from beautiful Buffalo, New York. Stephanie Skryzowski, how are you doing? Are you doing okay?
Stephanie: I’m doing great. Yeah.
Steven: It’s awesome to have you back. You did a great webinar for us last year. I can’t believe it’s been a year since we have had Stephanie back. It feels like we need to not wait that long, but time has no meaning now anyway, so it’s all good. If you all don’t know Stephanie, she’s one of my go-tos for budgeting. I was saying on our last webinar that, you know, it’s not always the most exciting topic, but Stephanie makes it fun, and that’s why we have her back, to talk about the topic. Check her out over at 100 Degrees Consulting. She’s also got a really cool online course called Master Your Nonprofit Numbers. You’re going to want to check that out. We’ll link to that later on. And this is her thing, money budgeting, crunching numbers, and I’m excited because I got a peek at our slides earlier this week. So, Stephanie, I’m going to pipe down here. I’m going to let you bring up your slides and you can regale us with all of your budgeting wisdom. Looks like it’s working.
Stephanie: Yeah. We got it. Okay. All right. We’re good. Hey, everyone. Thanks so much for joining us this afternoon, this morning, wherever you are. I am so excited to talk about budgeting and really how to use your budget as a roadmap to helping you grow and make a greater impact on the world. So let us dive right in. I’m actually going to turn off my video just so you don’t see my little face here and you’ve just got those slides. So like Steven said, thank you so much for having me. I was just so grateful to work with Bloomerang on this. I’m a CFO and I’ve worked with nonprofit organizations for over a decade and really helping purpose-driven leaders just like you better understand and use your numbers to grow your bottom line and grow your impact. And so my company provides CFO and bookkeeping services to nonprofits around the globe and yeah, super excited to be here. So let’s just dive right into what we’re talking about today.
So today we are talking all about budgeting, and this is really a great time for a lot of you. Anybody who has a January 1st fiscal year start, now is the time to start working on your budget, or maybe you have an October 1st fiscal year start and you’re kind of wrapping up the budget process. You are still in the right place. This is a great place to be. So we’re going to talk about, like I said, how to use your budget as a roadmap, as a tool to help you grow your organization. So we’re going to talk about sort of methodology and mindset around budgeting. We’re going to talk about breaking down silos and how to make your budgeting process more inclusive. We’re going to talk about five common mistakes that I see organizations making all the time and we’re going to help you avoid them. We’re going to talk about how to analyze and communicate your budget and then how to kind of take your budgeting to the next level through forecasting and cash flow management. So we’re going to make sure that your budget is a living breathing tool that you’ve used throughout the year to manage your organization.
So, first of all, methodology and mindset. What is a budget? A budget is your roadmap from planning the year’s income and expenses month by month, line item by line item, planning out how you’re going to go from where you are now to where you want to be. So when we talk about budgeting a lot of times we think of that, you know, sort of cut the lattes mentality, right? If you just, you know, cut your lattes, you would save $5 a day. And, you know, we have to cut, and shrink, and skimp, and save. And that’s the mindset that we work with a lot at nonprofits, especially because we are trying to stretch every dollar as far as it will go. So we’re trying to cram as many expenses as we can into the revenue that we have. So we’re not always efficient. We don’t always have a lot of infrastructure built into our budgets because we’re operating from a scarcity mindset. Rather than an abundance mindset where we’re sort of thinking, “Well, there’s enough to go around,” our opportunities are limitless to raise money, to be creative and fundraise in different ways.
So when we’re thinking about an abundance mindset for building your budget as a nonprofit, on the revenue side of things, let’s, instead of thinking, “Okay. Well, this is all we’re able to raise this year. And so let’s cram as much expenses as we can into that amount,” let’s first figure out what do we want to accomplish as a nonprofit? And then what is our plan to get there, then how can we then bring in the revenue to meet that goal? Right? And then on the expense side of things, we want to budget for what we need to not only get the job done, but get it done efficiently, make sure we have enough staff, and enough equipment, enough infrastructure to run like a well-oiled machine, rather than just sort of, you know, coasting through on fumes, right? And sort of a rethinking overhead as, you know . . . not overhead, but really core mission support. And we could probably get into, you know, an hours-long conversation on nonprofit overhead and what the right number should be and whatnot, but rethinking that concept of, you know, administrative overhead into, “Okay. What do we need to operate our mission effectively and efficiently?”
So shifting from the scarcity mindset where it’s not enough, we just have to scrimp and save and do as much as possible and as little as possible to this abundance mindset. So when we’re thinking about overhead, because everybody always asks, so how much should we budget for overhead? Right? So what I did was I pulled in some, you know, “best practices” from some of the charity rating organizations out there, Charity Navigator and the Better Business Bureau. And I just pulled directly from their website. So as they’re rating us, they are telling us that . . . Charity Navigator says less than 15% of our expenses should be spent on admin or overhead. Better Business Bureau doesn’t have a number for admin, but they want at least 65% of our expenses to be spent on programs. So I’m not saying these numbers are right or wrong, but this is kind of a base to start thinking about as you’re looking at your budget. So the point is, you need some money in your budget for infrastructure.
So we get this question a lot too, can we have a surplus? Can we have a deficit? Should we have a surplus? So there’s no IRS rules around breaking even, right? You do not have to have a zero net income budget. In fact, if you have a surplus budget where you’ve got more revenue than expenses, that might mean that’s helping you generate a reserve that you can tap into in future times, like for example, a lot of organizations I know this year, we’re tapping into that reserve because their fundraising dried up this year or their fundraising maybe was postponed due to COVID.
On the other side, a deficit budget where you have more expenses than revenue, that’s not sustainable for the long haul. That being said, if you have one year where you’ve got a deficit budget, that’s not going to make it wreck you. The IRS is not going to come and shut you down, but you have to think, “Okay. Well, where’s that money going to come from then?” If that’s coming from your reserves, deficit budgets year after year are not sustainable.
And so then thinking, “Well, what if we had revenue that was booked this year but the expenses won’t happen till next year?” So, yes, multi-year revenue sometimes generates a surplus or a deficit in your budget, and that’s okay, but knowing what that is and being able to explain it is super helpful. But if you’re just budgeting, you know, for a deficit, because, you know, you don’t have the revenue to cover your expenses, we probably need to make some decisions because like I said, not sustainable.
So when should you complete your budget? So, ideally, we want the budget to be approved by the board, ready to go in the accounting system, ready to be reported on by the beginning of the fiscal year. I can’t tell you how many organizations that I talk to that, you know, their year starts January 1st and it’s April and we still don’t have an approved budget. Well, then you’ve lost four months of reporting and analysis opportunities and opportunities to really help you manage the organization. So it’s really important to get this done on time. And a lot of times, we sort of underestimate how long it takes to put together the budget. And honestly, I like to give myself three months because by the time you have this inclusive process, we’re going to talk about, and it goes through a couple rounds of drafts and you analyze it and then the board finally sees it and discusses and approves that that is, you know, it takes a little bit of a runway.
We also want our budget to be done in conjunction with your strategic planning process. We want your budget to align with your strategic plan because we want to make sure that all of these amazing objectives that you’ve laid out in your strategic plan, that you actually have the resources to accomplish them. I see this happen all too often where we have this, just this beautiful strategic plan where we want to do all the things and have all the impact and then we go to the budget and it’s totally misaligned. So we don’t have any money to do anything. We can’t do any of it because we didn’t bencher that in. So making sure those two are aligned is really important. And then, you know, when to complete budgets, grant budgets obviously can be completed anytime and usually are completed all throughout the year.
So how does your budget actually help you? We’re going to dig into this one a bit more as we continue to talk today, but how does your budget actually help you? Why put the effort into your budget? Well, your budget is going to help you determine if a particular activity is realistic, right? You can map out, “Okay, what if we grew and added five more program coordinators to our team this year, is that realistic?” Well, plug the numbers in and that will tell you, right? It’ll also help you sequence and plan activities.
So one thing that is absolutely essential is mapping out your budget, doing it by month, right? So let’s not just put together a, you know, one-year budget for 2021 and just have lump numbers in there for the entire year. We really need to map that out month by month because what that’s going to do, it’s going to help you sequence and plan different things. So if you want to hire those five new program coordinators, well, maybe the majority of your revenue doesn’t come in until July. So let’s not hire them in January, right? And we would only know that if we mapped it out month by month. So it’s going to help you figure out timing of things.
And finally, your budget is a source of KPIs, key performance indicators, and being able to measure your performance, what you have actually done versus your plan, which is your budget. So your budget is a tool that’s really going to help you manage throughout the year. So I like to think of budgeting as simply planning your profit. And I know we’re nonprofits, but I just mean planning your, you know, planning, your net income, planning your future planning, your sustainability. A budget is just a plan. So I hesitate to use the word budgeting too much because people get all itchy about it, but what do you think is just planning your profit.
So I would love to know. Drop it into the chat box, what is your budget philosophy? Is your organization rooted in this scarcity mindset where there’s never enough and we’re always just trying to cram as much as we can into a limited, you know, amount of funds or are you rooted in abundance where you’re thinking of, “Okay. Here’s the objectives we want to accomplish?” And then, “All right. Well, how much revenue do we need to get there? How can we get creative to raise that money?”
And I’m trying to see the chat with my slides. Let me see if I can do this here. I want to say total scarcity mindset. Okay. Somewhere in the middle, lots of scarcities. I see some abundance. Love it. All right. Good. Abundance. Always looking to grow revenue. That’s so good. That’s so good. There’s limitless opportunity, right? We just have to get creative. Sometimes we have to pivot, pivot, but there’s limitless opportunity. I love it. Good, good, good. Okay. Let’s keep rolling. Okay.
So now we’re going to talk about . . . All right, the ins and outs of actually building your budget and what does the process look like? How can we break down those silos? If you’re, you know, a mid-to-large organization, you probably have a development department, maybe a marketing communications department, definitely a programs department maybe with some different, you know, branches of that. There’s lots of different departments in your organization and a lot of times what we see is, you know, maybe the CFO or the finance director does the budget, works with the executive director, kind of, you know, does some revisions there and then, you know, the rest of the team is handed a budget. Well, that is not a way to be super engaging with your team.
So why do we involve the team? Well, transparency. When we are open and about our numbers, about our financials throughout the process, that gives people a greater sense of ownership. We all know that when we involve people, they’re automatically more bought into the process, right? So they’re going to feel more ownership. They are going to be out there, you know, working to be as efficient, as effective with their budget as they can because they were a part of that creation. So they’re going to be more engaged.
So what does that process actually look like? How do we actually involve our team in the budget? Do we want like every single person in the organization just creating their budget wish list of what they want for the next year? No. Definitely not. What we do, what I have seen work most effectively is to create some teams, right? And a lot of times those teams fall naturally within, you know, departments. So you’ve got your development team, you’ve got your programs team, but maybe if your organization is pretty large, maybe it’s, you know, the department heads within that team or whatever it might be, but create, you know, specific pods that are going to own their section of the budget.
Then what we want to do is we want to share a budget template with them. I’ve seen organizations just tell their people, “Okay. Create your budget and send it back to us.” And if they have five different teams, we get five different templates back and they don’t talk to each other and they’re not, you know, organized and then it takes the finance team a million years to kind of compile it and pull it together. So it’s something, you know, that you can analyze and look at.
So we want to give them a template and that template needs to mirror our accounting system. So that budget template needs to have all the same line items that our accounting system has. It needs to mirror the income statement from our accounting system. I see a lot of times, you know, we have different line items in the budget then we have in the accounting system and then it’s a yearlong battle of trying to map the two together so you can actually analyze it. So let’s make sure that that budget template matches and mirrors the accounting system.
So we’re going to give these templates to our team, we’re going to give them some parameters like, “Hey, we’re anticipating 20% growth this year. So your budget needs to stay within 20% growth over last year.” Right? We don’t want to give them a template and then again, have a free for all the wish list, because what that’s going to do is they’re going to hand us the budget, we’re going to have to then slash it in half. And that’s not good for morale. That’s not a good use of time. So give them some parameters. Then we’re going to review, we’re going to revise it, we’re going to compile it together in one, we’re going to compare it to last year, and then it’s going to be ready for the board. So this also takes time, and so that’s why I’m always recommending, like let’s start the budgeting process three months out from when we want this thing done.
So I would love to know, how could you make your organization’s budget process more inclusive, more engaging? So do you include your team now in that budgeting process or is it, you know, maybe just leadership that’s doing it, or maybe just the executive director, or maybe, if you’re a one-person show, maybe you’re the one that’s doing it, but I would love to know. Yeah. I would love to know, who’s involved in your budget process. And, yes, I do have a sample template that I’m going to share with you.
All right. So the executive director, the grant writer. That’s a great idea. The development team, anybody who’s working on the revenue side of things, making sure that you’ve got all of that mapped out since they’re responsible. Everyone’s included, program staff, accountant, board. Awesome. Yes. I love this. One-person show with a supportive board. I love that. Well, that’s okay if you do it yourself then.
Yeah. I saw a couple that we need to include the program staff. Yes. It’s so important. I mean, at the end of the day, they’re the ones that are sort of on the ground, you know, serving whoever you serve, doing the work. And so including them in the budget process is so, so important. Barely have any staff input now. Yeah. I love it. I love watching this process become more inclusive. You’re going to get that increased ownership, that increased buy-in, and it’s a way to bring the team together. So I love that.
Okay. Let’s go to common budgeting mistakes. And I’m going to give you a little questionnaire at the end, like which mistake have you seen on your budget before? And there’s no shame. I I’ve seen this a million times over most of the organizations that we work with. So mistake number one, incomplete expenses. So I just mean you forget to include something, right? The budgeting process, it’s a lot, right? Where we have all these line items, all these staff members, all these departments, all these programs, we’re trying to do all the things then we forget something.
So one way that I encourage you to prepare your budget is by comparing it to this year’s projections that way you can see, “Okay. This is what we spent money on this year. Let’s make sure we’ve included that amount or that line item” or whatever it is for next year that helps you kind of, you know, make sure you’re not forgetting something. So thinking through all of your people and all of the associated costs that come with people. Sometimes we forget, “Okay. If we’re adding those five new programs staff, oh, yeah, we got to buy them computers.” So let’s not forget the computers. Those little things that we sometimes forget, oh, rent, okay. We’ll make sure we include our, you know, phone and internet , you know, professional services, any consultants, or accountants or lawyers that you have, all of your program costs, including your program team here, they’re not going to let you forget any program costs that they need to run their programs. Okay. So that also helps combat this very common mistake.
So mistake number two is incomplete revenue picture. So. again, involving your development team, your grant writer, those people are going to help you kind of put together that puzzle of revenue, your revenue budget for the year. So a couple of other ways to put together this revenue budget are looking at last year. That’s always a great place to start and really the foundation of where I like to start from. Looking at your revenue by type, so your different sources of revenue, kind of laying it out that way and then using this building block method to come up with what your goals are going to be.
So, for example, if you know that you’ve got, you know, your individual donors give an average of, you know, say $500 in a year and you know that you have a database of, you know, 10,000 individual donors and you know about, maybe half of them are going to convert to give again this year, you can kind of do the math that way and so work backwards. So instead of just saying, “All right. We want to raise a hundred thousand dollars this year from individuals,” let’s actually do the math and figure out what that means. And is that number then realistic? Right? A lot of times what I see is the organizations like just plugging numbers in there. You know, maybe we raised 60,000 from individuals this year, but we’re like, “Yeah. Let’s do 100,000 the next year. Like, how are we actually going to get there? That’s a part of this budget too, is kind of really breaking it down so these goals are attainable.
So mistake number three that I see a lot is there’s a misalignment between your accounting system, the way that you need to report your numbers and your budget. Right? So I said this before where the budget template that we use, we want to make sure that those line items are the same ones that are in our income statement in the accounting system. Because number one, we want to get that budget entered into the accounting system, so to run a budget versus actual, it’s a click of a button every month, but we also want to make sure that all of those line items are aligned with the way that we need to report to on our budget. Maybe it’s to, you know, to funders or maybe it’s the way that report we report to our board.
I cannot tell you how many organizations will, you know, have their budget, they’ll have a budget versus actual from the accounting system, but then it’s like this, you know, four-hour process of sort of rejiggering the entire report to present to the board. And, you know, they’re not like hiding anything, it’s just a different format that they want to present to the board. Well, why not back it all the way up to the budget, let’s get the budget and the accounting system aligned with the way that we want to report on our numbers, right? So making sure all of that is aligned from day one is going to save your finance team, and your executive director, everybody so much time in the long run.
So mistake number four, this is a little bit of an accounting things. So don’t run away if you see the word accrual, but mixing up accrual versus cash. So this is the pain of a lot of a lot of nonprofit leaders’ existence here, thinking of accrual versus cash. So accrual means that you record revenue when it is committed. We often call these pledges, right? So if you’re at the, you know, you’re at dinner with Sally and Sally says, “Okay. I’m going to give you $15,000.” And then later that night, she sends you an email and says, “I’m going to give you $15,000,” you are recording that pledge as revenue when she says, “I’m going to give you $15,000.” She hasn’t given you the cash yet, but you, according to accounting rules, have to record that revenue when it is pledged.
So the other side of things is, you know, on the cash side, you’re recording revenue when the cash hits the bank. Right? And so one mistake that I often see with budgeting is that, you know, sometimes we’ll mix up accrual versus cash. Okay. You know, “The Smith Family Foundation is going to give us $100,000, so let’s put that in here,” but then we’re also including cash that we’re receiving from last year’s pledge. We want to make sure that if we’re accrual accounting, that everything is done for the budget on an accrual basis. We’re going to get into cash flow in a little bit because that’s also really important to manage, but just making sure you’re not mixing up the two. Pick one or the other. And you probably already have an accounting methodology that you’re using. Most nonprofits I know use accrual. So just make sure you’re not mixing those two.
And number five, missing the miscellaneous. So there’s always those little things that trip us up that we forget to include and then, you know, at yearend, when we are looking at our income statement, we’re like, “Oh, shoot, this is really far off the budget because,” for example, “We’ve forgot to include depreciation expense.” Right? A lot of us have equipment or vehicles that we need to depreciate. That’s not a cash expense, so we often forget about it, but it does hit our income statement. So when, you know, at the end of the year, we might have a deficit where we thought we were going to break even because the depreciation expense is included in there and we didn’t budget for it.
Also thinking about in-kind, a lot of us get in-kind donations, any capital expenditures, so the expense for capital expenditures is not going to show up on your income statement. It shows up on your balance sheet, but the cash is still going out the door for that capital expenditure. So we want to make sure that we’re tracking that somewhere in our budget. If you have, you know, a mortgage and any debt payments, again, making sure that those are showing up in your cash flow forecast or in your budget accordingly. So all the little stuff, and again, a great place to start to make sure you don’t miss this is this year’s financials, balance sheet, and income statement.
All right, my friends. Time for everybody to fess up. Just kidding. Does your budget, or has your budget, have you had one of these common mistakes before? Maybe you’re missing revenue or you forgot to include a big grant that was coming in, or perhaps missing expenses, or mixing up accrual versus cash. Super confusing. Maybe it’s not aligned to your accounting system. Maybe you forgot something. Not alignment, not alignment, not alignment. Okay. Yes, Irene, we are only human after all. That is true. That is true. And it’s okay. And none of this is something that you can’t recover from. Right? But being able to kind of check these boxes and make sure all of this is in place, it’s going to help you manage your organization much easier and more efficiently.
All of these not aligned, but now fixed. Awesome. Forgetting some expenses, for getting stuff. Yeah. It’s the alignment to the accounting system. Oh, my goodness. That’s huge. Yeah. It’s huge. And making sure that you’re aligned from day one is really going to help your reporting throughout the year. Budget arrives some we’re expected to make magic happen. Yeah. Silos. That is huge. All right. Yeah. Love it. Thanks for everybody being super honest.
Well, now that we know what these common mistakes are, we can kind of make sure we’re checking the box as we’re doing our budget for next year. Okay. We have a budget now. We’ve got our budget and we have involved the whole team and we have checked the boxes. So we have not made some of these common mistakes, now, what do we do with this thing? So let’s talk about analyzing it. So, first of all, what does that template look like? I saw a few people in the comments saying, “Do you have a template to share? What does the template look like?”
So here’s what I like to do. And I’m going to share a resource at the end where you can grab an example of this template, but here’s what I like to do. I like to look at the current year budget. So I’m going to use 2020 as an example and say right now I’m preparing the budget for 2021. So if it’s 2020, I have my 2020 budget in this sort of orange column here, this current year budget, then what I want to do, I want to know what do I think 2020 is actually going to look like. At the end of the year when I run my income statement, what am I actually going to see? And we know this year like no other has been so different than what we thought it was going to be in January, right?
So that’s why looking at your current year projections and comparing against those for next year’s budget is almost more important than comparing budget to budget, right? And this is where I see, again, a lot of organizations sort of skipping this middle section, this blue part, right? So what I want you to do as part of the budget, and this again, this is why the budgeting process can and should take a little bit longer is because we’re going to try and project out this year.
So if we’re doing this right now, we’ve put in our current year actuals to date. So say we’ve closed the books through August, let’s put in January through August actuals and then let’s put in some projections for September through December here. You know, it’s not going to be perfect, but we have our best guess of what we think is going to happen. That gives us our total current year projected. So that gives us what we think 2020 is going to look like.
Now, from here, then let’s build the budget and then let’s compare those numbers, right? So these variances here are comparing this year, 2020 projected, compared to 2021 budget. So you can see the variances. All right. You know, we thought we were going to come in at, you know, 500,000 for this year, e actually came in at 1.5 million. Next year it’s going to be about 1.3 million. And where’s that variance compared to what actually happens this year? Right? So this blue part, especially is kind of the missing piece that I see a lot of organizations skipping. And I think that is very valuable because the year often doesn’t turn out as we thought it was going to at the beginning of the year.
Okay. How do we report on our budgets? You have probably all seen a budget versus actual report. If you’ve got the budget in your accounting system, it should be super easy peasy to pull that budget versus actual report every single month. And so, you know, this is what that is, just all of our actuals compared to the budget for that period. It tells us if we’re over or under budget and then tells us, in this case, what percentage of the budget we have either raised on the revenue side or expense on the expenses side. And really here, these variances, to me, are the most important and the most telling. I like looking at variances because you can quickly kind of, you know, your eyes can kind of scroll through and see like, “Okay. Where are the biggest variances? Where do we need to look at?”
So when we think about metrics for our budget, you know, we don’t just want to pull this budget together, hand it off to the board and kind of roll forward, let’s do a little analysis of the budget, right? Let’s look at our revenue diversity, how much of our revenue is coming from each source. It’s kind of, you know, let’s not put all of our eggs in one basket, right? That’s what I’m talking about here, making sure that we’re not relying too much on one or two funders or one type of funder to fund our whole organization.
So we look at revenue diversity. We look at our revenue and expense growth. So those are the variances that I was just talking about, we look at, you know, what percentage increase are we looking at on the revenue side? What percentage increase on the expense side? I always like to make sure that our expense growth is not outpacing our revenue growth, right? Like we don’t want our revenue to be growing by 10% but our expenses are growing by 70%, right? Something is not right there. So looking at those variances.
Knowing what our burn rate is. Your burn rate is just your average monthly expenses. So looking at your budget for the year, your expense budget dividing that by 12, on average, how much money are we spending per month? That’s always going to be . . . that should be a sort of metric that just lives in your head so you know, “All right. If we spend roughly $100,000 a month, we want to make sure we’re bringing in, you know, $100,000 a month so that we can keep this organization afloat.” That’s always a good metric to have in your head.
Looking at our operating margin, this is also called profit margin. Again, we’re not setting out to make a profit, but we always want to know like how much revenue is left over after our expenses. Right? And if you’re working as an organization to build a reserve to sustain you through uncertain times, making sure that you’ve got a strong operating margin at the end of the day and looking at that metric as you’re doing your budget is really important.
And then months of cash on hand. So this is, you know, a little bit of a combination of your budget and also how much fun you’ve got in the bank, but really understanding, okay, if you’ve got $200,000 in the bank and you’ve calculated and you realize your burn rates or your average monthly expenses is $100,000 like I said, all right, you’ve got two months of expenses in the bank and maybe you have a goal as an organization to get to three months. And so that’s going to help you also plan your budget, right?
If you know, “Okay, we have two months of operating expenses in the bank. Our goal is really to get to three in the next two years.” So that means you would need $300,000 in the bank. Well, you need another 100,000. Maybe you add 50,000 to your revenue goal this year and 50,000 to your revenue budget next year. So these types of metrics will help you think about the budget in a deeper way, and really, again, use it as a tool to plan for your organization. So analyzing the budget, I just talked about, you know, some quantitative questions to ask yourself, variances and expense growth, and making sure you’ve got enough revenue and you know what revenue sources and where the money is going to come from.
Then on the qualitative side. So this kind of goes back to what we were talking about before, where making sure your budget aligns with your strategic plan. So does your budget reflect your values? So, for example, I worked with an organization was like our employee, like internal culture is so important to us. We are really proud of our culture. We invest in our team where, you know, team culture is so important.
But guess what they didn’t have in their budget? There was no budget for team culture, for like, you know, team building activities. There was no budget for any of that. So how can we say that team culture is really important to us if we have no resources for it? So thinking about what your values are and making sure your budget reflects that. Does your budget have enough infrastructure support? Are your team using, you know, 10-year-old computers or did we put the budget in there to replace some of those old ones because they’re super inefficient and held together with duct tape? True story. I had a computer working at a nonprofit for like five years that was literally held together with duct tape. And, again, does your budget align with your strategic plan?
So poll time. When you’re thinking about analyzing your budget, which qualitative or quantitative question do you feel like it’s going to be most insightful for your organization? Do you have the infrastructure support? Does it align with the strategic plan? Is your expense and your revenue growth, are they aligned with each other? Do you know where your revenue is going to come from? When you think about analyzing your budget, what kind of sticks out to you? Not enough infrastructure support. I see so many questions in the chat. I’m so excited. Alignment with strategic plan. We need a strategic plan. Where’s revenue coming from strategic plan and values, infrastructure support. Oh, my goodness. Alignment with strategic plans. So good. Yeah. A tie between growth and outpaced revenue, infrastructure, infrastructure, infrastructure, vision. Love it. Where’s revenue coming from. Oh, that’s so good. Yeah. Diversity of revenue. Not enough infrastructure. Oh, my goodness. I sense a theme. Awesome. Okay. Let us keep rolling here.
Okay. Our last kind of section here is talking about forecasting and cash flow. So doing your budget is kind of like base level, right? We all have to have a budget and it has to be approved by the board. We all have to do it. Forecasting and cash flow is going to take that management to the next level. So this is like budgeting 2.0. And this is really going to help you throughout the year. So we all know. I mean, if 2020 is anything, it is a testament to how much things can change and we need to be flexible and agile to pivot when needed, right?
So we all set a budget in January of this year and we all know the world turned upside down in March and has continued to turn upside down in a back and forth in a million different ways in the last six or seven months. So things change, right? So what forecasting does on a monthly basis is it allows you to have your static budget, right? The budget does not change throughout the year. We don’t change the budget with, you know, like every new breeze that comes passing through. We do not change that budget. But what we do is we have a forecast every single month that we relook at those budget numbers and we adjust our forecast.
So what I have kind of laid out here is a template that we use for all of our clients that that we work with that kind of combines actuals and projections. So this is a combination of looking backwards. You know, we can see January through March here, we’re looking backwards and then April through December, we’re looking forwards. So it’s a bit of a combination of, you know, history and future.
So what I love to do as part of my monthly process with every organization that we work with is we’re filling in the actuals as they’ve happened, right? So last month we fill in all of the revenue, what actually came in, we fill in all of the actual expenses, and then we look at the future months and maybe we know that, “Okay, we see, you know, this foundation gift of $200,000. We had forecast it June. Well, we know they’re not going to be able to give that to us in June and now they said it’s not going to come from October. Well, let’s move that to October then. We’ll know about it in October. Let’s move it to October.” We don’t change the budget. We change the forecast.
So this gives us an up to the minute look of what our year is going to look like with a combination and with already have been to what we think is going to happen and we’ve got this forecast total. So we don’t change the budget. The budget stays in the accounting system as it is from, you know, January 1st onward and we use this projection to give us a more closer up-to-the-minute book.
So then cash flow. So this is one area that I see most organizations not having a great process for managing cash flow. And so this is the same sort of structure as you just saw the forecast template where we’ve got our actuals and then we also have our projections. And so you can see that we’ve broken out by, you know, we’ve got the money coming in, our current year revenue coming in, maybe some prior year revenue. So if we had some pledges from last year that are not marked as revenue this year but like cash is coming in, let’s put those into the cash flow. We have all of our expenses going out and then we have our end of period cash balance. And so you can see like this basically means at the end of October, we had, ooh, negative $10,000 in the bank. Don’t know how that happened. That’s not good. It looks like they’ve got a line of credit here. And so then that ending balance goes to the next month’s opening balance and so on and so forth.
I’m going to share a template with you all so you can kind of play around with this for yourselves, but this is really important to use on a monthly basis as well. This is tied to that forecast. So as you shifted that $200,000 foundation gift to October, from June to October, just like I showed you, it’s going to shift on here as well. So you can see what is the impact to your cash balance, your actual money in the bank if that happens. And so this, like I said, using a forecast and this cash flow is taking that budget to the next level. Your budget doesn’t change, but you have a forecast and a cash flow that you’re looking at every single month so that, you know, you’re not working from something that was created eight, nine, 10 months ago.
So I love this. I love the saying, revenue is vanity. So revenue is your top line number. Profit is sanity, that’s your very bottom line, revenue minus expenses, but cash is queen. It’s usually cash is king, but I prefer cash is queen. So that means like we’ve got to [stay on top 00:42:29] of our cash, that needs to be part of your budgeting process because without cash we can’t do anything, right? We can’t pay our people. We can’t buy the supplies that we need to serve our communities. We can’t do any of that if we don’t have money in the bank. And so cash flow needs to be a part of your budgeting process. So a great budget, you know, with a big surplus and, you know, it may look beautiful on paper, but if you don’t have the cash to support that, it’s kind of useless, right? You can’t do anything that you need to do without cash.
All right. Okay. Do you build cash flow forecasting and cash flow management and regular forecasting into your monthly routine? I will now. Yes. Yes, yes, yes. Lots of people saying I will try now. I’ll do it now. Cindy already does. That’s awesome, Cindy. That’s so good. That’s so good. I love it. I love it. So I’m going to give you . . . Yeah, I’m going to give you some of these templates so that you can try and so that you’ve got the resources that you need to do this and to build this out at your organization because this is going to . . . you are literally able to see into the future of your organization as you are doing this, right? And at the end of the day, forecasting is just our best estimate, right? It’s not going to be perfect, but it’s better than not looking at this at all, right? I love it. All right. Let’s see here. Okay. So we are wrapping up.
That was our last big section to talk about. So let’s talk about some key takeaways here. So going all the way back to 45 minutes ago when I started talking and thinking about your mindset when it comes to budgeting. So shifting from that scarcity to an abundance mindset. There is limitless potential for you. I don’t care what your organization’s mission is, what you do, who you serve, we are all creating impact. We are all creating good in the world and there is limitless opportunity. You may have to be flexible. You may have to pivot. You may have to, you know, change things up and think in a different way, but there’s limitless potential. So shift to that abundance mindset.
Include your team in the process. They are going to be so much more involved, so much more engaged. You’re going to get more accurate budget, honestly, if your whole team in some way, shape, or form is involved in the process.
Avoiding those common budgeting mistakes that we talked about, I think a lot of people, you know, identified very easily like, “Oops. Yup. Definitely have done this before.” Well, now you know, let’s check those boxes when we’re doing our budget this year so we don’t do that again.
Analyzing and communicating your budget and thinking about some of those metrics that I mentioned and how you can use those to really sort of take that budget to the next level. Instead of just handing over an Excel sheet to your board and saying, “Please approve this,” like what did those numbers actually mean? Making sure it’s aligned with your strategic plan and your accounting system, and then adding forecasting and cash flow management to your routine. Lots of people are ready to dive in and do this. I’m so excited for you guys to get this stuff in Excel and just dive in. I think that it’s going to be super helpful for your organization.
So you have already gotten these slides and the link is in there, but if you wanted to go, there’s budget template, there’s a little budget checklist in there if you just go to 100degreesconsulting.com/budget. You can pop your info in there and we will send this right over to you. So be sure to do that. Again, if you are not able to grab the link now, you have the slides. I think Steven sent the slides, so you should be able to get it there. And I would be happy to answer some questions. I see like there were so many in the chat. I can’t wait.
Steven: Yeah. This is awesome. We’ve had a lot of activity here. I told you folks it as going to be good and Stephanie knows her stuff. And cash is queen. That’s objectively true, right? I mean, most fundraising dollars come from women, right? So there you go. It’s true.
Stephanie: Even better. I love it.
Steven: I like. Okay. So we got a lot of questions about forecasting, specifically, Stephanie. When should you start? Is it like an annual process? Quarterly? What’s a good time horizon for forecasting, do you think?
Stephanie: Yeah. So let’s use just calendar year 2021. So we’ve got our budget for 2021, our budget that’s approved by the board. I would say after you close January books, let’s look at the rest of the year, starting after, like after the first month, you can forecast and look at the rest of the year because in those 31 days, something may have already changed and something may shift around. I would say, you know, I think it also depends on the size of your organization, right? So the smaller organizations, you can probably do it on a monthly basis. Just start after the first month, look at the rest of the year. Larger organizations, I worked with one organization where we implemented a quarterly forecasting process because they almost went through like the budgeting process, but just with the forecast. So it was a lot more involved and they did it quarterly. So I think depending on your organization, how many moving pieces you have, how many people you have, it can be done either monthly or quarterly.
Steven: Okay. That makes sense. And then along the same lines, we had a lot of people who had an event that got canceled or moved, but that that revenue might’ve been forecasted or expected. What should those folks do, if they do it often like you just recommended, it seems like they could just change those things up. But what about those things that maybe they planned on happening, but it didn’t actually happen and, of course, the money didn’t come in either?
Stephanie: Yeah. Well, I think that, you know, having this forecasting process in place will allow you to like make the shift. So, for example, if you had a fundraising event in April of 2020, well, that was long gone, right? Like we knew that. That was canceled. So if we were doing this forecasting process on a monthly basis, you know, and we just basically took all of that revenue out and put a zero there, we would kind of see the impact of what that means for the rest of the year for the organization. And so then you could kind of make decisions on, “Well, what do we need to do, right? Do we need to get creative and do a virtual event or are we okay without this fundraising event if we wait until next year? And that’s the beauty of forecasting, is that, you know, you are able to see revenue, expenses, and cash flow into the future rather than just sort of making, you know, making a decision on a hunch.
Steven: Makes sense. What should folks do if they see that expenses are starting to kind of creep up and maybe they start to kind of outpace the revenue coming in? You know, what are those warning flags they should look for? And if they see them, should they, you know, go into austerity mode or maybe start cutting small, you know, bits and pieces here and there. What about that, that people see, maybe that’s creeping up?
Stephanie: Yeah. I always like to look for the low-hanging fruit first. And I know that I said before, like, okay, this is not like a, you know, got to chop and slash and save and on the expense side of things, but oftentimes as expenses are creeping up, we’re paying for things that we like don’t remember, or, you know, I think we all like in our personal lives, we all have that subscription to something that we bought like two years ago that we’re still paying for that we haven’t used in a year and a half. So there are probably some low-hanging fruit expenses. So I just recommend taking a look at those first, if we’re watching our expenses creep up. What are the non-essential expenses that we’ve got going on that could probably either go or be put on pause?
We had these conversations with so many organizations, especially back in March, April when we’re like, “Okay, we want a plan right now to make sure that we don’t put ourselves in a position later where we’re really crunched.” And so that’s what we were recommending. Lots of pausing, lots of cutting the low-hanging fruit. One thing I would say though, as you’re thinking about, you know, expenses are creeping up, revenue is not really going anywhere, don’t cut the sort of ROI generating expenses. So, you know, for example, if you have a contract and grant writer, they’re probably not what you want to cut because they’re the ones that are bringing in money, right? So thinking about what you have in your budget that actually generates revenue in some way, shape, or form, that’s the stuff you want to keep. It’s the other stuff that you’re not using that’s not useful that you want to think about getting rid of.
Steven: Love it. Yeah. Don’t fundraising folks. It’s money coming in. So getting buy-in, you know, getting other people involved in maybe the budgeting process, who should those people be? How often, how should you gather their input? You know, it seems so often in nonprofits said a lot of things are done by committee. So I imagine you might want to avoid that at some level, but who should they be asking? Is it board members? Is it everybody? Is there a survey? What do you think there?
Stephanie: Yeah, I mean, I definitely think it depends on your organization. Like it’s going to be different for a small organization with one executive director and a very active working board versus a, you know, fundraising board with, you know, a CEO who’s got, you know, six different departments and lots of layers. So I really think it depends on like, “Okay. Let’s figure out who’s managing programs, who oversees our programs.” Right? That person needs to be involved. And if that is, you know, if programs are really large, you’re a large organization and that’s a $10 million unit right there, well, you probably want to go at least one more level down so you’ve got like the individual program leaders as part of the budget.
On the other hand, if you’re a really small organization and your, you know, your fundraiser is basically the fundraising committee on your board, they should probably be involved, right? So thinking through who is in charge of programs, fundraising, sort of admin, HR, maybe marketing and communications, thinking who’s in charge of each of those departments and then making sure that person is definitely involved, and depending on the size of your organization, maybe like one more layer down.
Steven: That makes sense. Can you talk a little bit about dashboards, maybe in like a monthly or quarterly board meeting where you might want to report on financials, but not load them up with, you know, every spreadsheet? What are some of those key maybe metrics or KPIs that you think are really important to show a boss or the board at a kind of a high level?
Stephanie: Yeah. I definitely think I’m looking at revenue by source. So, you know, a lot of organizations we work with have like individuals, foundations, government, and corporations. Let’s just say those are your four buckets. So not going any farther down in detail than that, but looking at, you know, our actuals for each of those categories compared to budget and compared to last year. So I always like to have a point of comparison, otherwise numbers in a vacuum are meaningless, right? I have no idea if $200,000 this month is good because I’ve got nothing to compare it with.
So looking at that I would say on a high level, that is awesome to show it to a board. And I actually have another session I do often, which is storytelling with financials, which is the one we did last year, where we talk about how to sort of tell the story of some of these numbers and visualize it. And in that presentation, I did . . . it’s all like charts in Excel. Like I purposely made it very simple so that we can all do it. So taking that data that I just mentioned, you know, having Excel, like tell you what chart to use and then creating a chart report is, I mean, that is a great way to sort of showcase some of that data.
Same thing on the expense side. If you have, you know, in your income statement, if you have a bunch of different line items but they all kind of, they each roll up to sort of a bigger bucket. So, for example, if you have like salaries, health insurance, payroll taxes, if those all roll up to like a personnel category showing that roll up in the same way, comparing the actuals to budget and to last year is a great way to kind of dashboard show some interesting data to your board.
Steven: Makes sense. Yeah. I love what you said about not just showing numbers in a vacuum. So year-over-year comparison, same period over same period. Yeah. I love it. Geez, we’re almost out of time. Maybe a good final question. I know we didn’t get to everybody, but I know you got your contact info, Stephanie. But a lot of people have said they’ve never put a budget together before, this is their very first one. Any tips for those people who are really truly just getting started with this?
Stephanie: Yeah. I think that’s such a good question because you don’t have the benefit of looking at last year to compare to, right? So you almost are putting some numbers together like in a vacuum, but what I would recommend is breaking it down by like unit costs sort of, I say cost, I don’t necessarily mean cost, but breaking it down by unit. So if you’re like, “Okay, you know, I think our average donor is going to give us $100 and I think we could probably reach out to like 100 people.” Okay. Well, multiply that together, there’s your individual giving, you know, number.
On the expense side of things, if you’re thinking you know, okay, well, you know, your rent is this much or you know, all right, this year we’re going to need to hire three program coordinators and if they each make $50,000, like break it down by unit cost, I think that’s going to help you understand the budget a lot more and be able to scale up and down from there versus, “Oh, okay. Let’s just put like 150K in the person that align.” Well, like what is that? You know? So that’s the way I would do that, is by breaking everything down by unit cost as much as you can.
Steven: Cool. I love it, Stephanie, this was fun. I knew it’d be fun even though it was a financial topic, which I like, but not everybody does. So I’m so glad that you came on and shared your wisdom. And I shared your previous webinar in the chat. So look for that link there, folks. That’s a really good one too. Stephanie, how can people get a hold of you to keep the conversation going?
Stephanie: Yeah. So 100degreesconsulting.com is my website. My email is [email protected] And I would say that’s probably the best way. I’m not like a super big Twitter person, but we’re over on Facebook at 100 Degrees Consulting also. So I see like there’s so many questions in here. If you guys had any questions that I wasn’t able to answer or you didn’t find the answers to, feel free to reach out, I’m always happy to connect and chat.
Steven: Yeah. Take her up on that. Good newsletter too. I like getting your emails occasionally too, Stephanie. Those always pop up in my inbox. So thanks for doing this. This is awesome. Very timely and needed, for sure. And thanks to all of you for hanging out for an hour or so today. We so enjoy having a full room in here, so thanks for doing that.
We got some cool webinars coming up next. We’ve got two next week, including one on Tuesday. If any of you are reluctant fundraisers, maybe you’re not comfortable asking for money, maybe you’re a little shy, not sure how to start if you’ve never done it, we’ve got Cindy Wagman to give you a pep talk. And bring a board member or invite a board member if maybe they shy away from fundraising as well. Cindy’s awesome. That’s going to be a good one, 1:00 p.m. Eastern on Tuesday. Totally free. Got another one on Thursday and then a ton more, you know, through the end of the year. So we’d love to see you again on another session.
So we’ll call it a day there. Like I said, look for an email from me with the slides and the recording. Connect with Stephanie, obviously a wealth of knowledge and a super awesome person, so you can keep the convo going. But we’ll call it a day there. Have a good rest of your Thursday, have a good weekend, stay safe, stay healthy, and we will talk to you again soon. Bye now.
Stephanie: Thanks, everyone.
Steven: See you.