Budgeting is always, to some degree, an exercise in uncertainty. But the current budgeting environment is unlike any experienced before. As a result of the COVID-19 crisis, many nonprofits have seen deep declines in revenue while the demand for their services has spiked. These and other pandemic-related factors may call for organizations to take a different approach to budgeting. This article discusses rolling budgets and reforecasting. A sidebar reflects on how nonprofits should budget for COVID-19-related expenses, such as sanitation-related services and employee assistance.
Avoid the typical tack
Most nonprofits historically have relied on so-called static (or fixed) budgets that are developed in advance of each fiscal year, based on estimated activity. The numbers don’t move as activity levels increase and decrease or circumstances otherwise change.
This approach can work for organizations that generally experience relatively minor changes year to year — for example, a small nonprofit supported largely by stable grant funding. It can pose problems, though, in a turbulent landscape like that of the past year. Rolling budgets or, more drastically, reforecasting may prove necessary to deal with such volatile times.
Roll with the punches
Rolling budgets are more flexible than their static counterparts. Rather than leaving a budget in place for the year, organizations with rolling budgets set times throughout the year to readjust the numbers. For example, you might budget four quarters ahead. At the end of each quarter, you would update the budgets for the next three quarters and add a new fourth quarter.
The rolling approach anticipates changes and encourages your organization’s leaders to take a forward-looking perspective. It works well for nonprofits dealing with shifting ground and evolving strategies. That’s because it facilitates more timely responses to emerging trends, whether on the revenue side, the expense side or both. Plus, it provides more useful information for decision-making than a backward-looking static budget.
Reforecast for trigger events
However, for most nonprofits, it’s probably safe to say that the COVID-19 crisis has represented something more dramatic than simply shifting ground. It has shaken their foundations, including many of the assumptions on which they built their budgets. If your organization is among them, you may want to consider reforecasting your entire budget. It might seem overwhelming or like overkill, but it could boost your nonprofit’s odds of survival.
Reforecasting generally makes sense when your organization expects or has undergone a major change that has implications for overall operations (a “trigger event”), such as securing or losing a large grant. It’s also wise if it becomes clear the existing budget is materially inaccurate. Reforecasting requires taking a holistic view of your entire budget, accounting for the new circumstances and updating wherever necessary. The final product is a fully revised budget, not just a handful of line item adjustments.
Apply budget modeling
With reforecasting, you typically begin by determining the costs and revenues that are variable (for example, supplies and program revenue) and the effect that the trigger event might have on them. In the case of an event as far-reaching as the pandemic, you also might find that fixed expenses like payroll or rent are affected. You’ll need to reforecast any of these items that are likely to differ substantially from original estimates.
You may find it worthwhile to apply budget modeling, considering different scenarios. For example, what would happen if a major revenue source was cut by half? Or if it disappeared altogether? Would you seek a loan, cancel a capital project or trim staff?
It’s also a good idea to check in with department managers to get their views from the forefront. They might see trends coming that could affect the bottom line but escape the notice of budget makers.
Stay on top of it
Regardless of whether it’s your official “budget season,” you need to stay on top of the figures. Regular budget monitoring and review are advisable to catch significant variances and make appropriate adjustments even when a pandemic or other catastrophe isn’t in the picture. Be sure your board is active in the monitoring process.