Many organizations, especially new 501(c)3s, come into their budgeting discussion with the mindset, “We can’t spend money on that, we’re a nonprofit organization!”
If you’re still thinking about your organization’s budget in this way, founder of the Charity Defense Council Dan Pallotta has some words for you:
“The way we think about charities is dead wrong,” Pallota said.
It all comes down to something called “The Overhead Myth.” This is the myth that you can reasonably evaluate a nonprofit’s performance and trustworthiness by only looking at how much they spend (or don’t spend) on overhead. An organization’s overhead refers to the cost of doing business, such as operating, administrative and technology expenses.
If this were true, it would mean that the dollars spent supporting your infrastructure don’t also support your mission. Of course, we know this to be untrue!
Remember, you’re a nonprofit, right? That doesn’t mean that you shouldn’t invest in areas that will provide a return for your organization. Underinvesting in overhead impacts your ability to deliver on your mission and sustain your organization, and it’s a huge disservice when it comes to trying to achieve your mission.
Consequences of underinvestment in overhead include:
- Limited or no staff for admin roles. This leads to a limited ability to manage and monitor your organization as a whole.
- Limited investment in staff training and development. This leads to increased turnover, stagnant skills and difficult internal advancement.
- Inexperienced staff for admin roles. This leads to high turnover and poor work quality.
- Poor IT infrastructure. This leads to system crashes, downtime, loss of data and information and limited info sharing.
- Poor donor management systems. This leads the inability to track donors and fundraising progress, along with limited ability to target fundraising.
- Poor performance management systems. This leads to limited ability to track outcomes or easily generate reports for grantors.
The truth is, investing wisely in the right areas of your organization allows you to reach more people and create more impact, not waste more money. So, how can we educate donors and funders (and even board and staff!) about this issue? Honesty is the best policy. Be upfront, honest and transparent with questions addressing typical admin and infrastructure costs. Have a discussion about why overhead is viewed negatively and why you should focus on ROI instead.
How to Build Your Budget
Now that you’ve hopefully had the tough conversations, it’s time to start building your budget. You’ll want to keep a few key tips in mind. For example, put aside 15% of your income per month and invest that back into your organization at the end of each fiscal year in branding or technology upgrades for a greater return. Ask for input from your board, staff and volunteers to get buy-in and alignment. When you’re ready, reference these tips:
- Use a template! There is no need to reinvent the wheel. Instead, personalize from a template that already exists.
- Put your income first. It helps to know what’s coming in as a starting point.
- Be conservative and also realistic. Wishful thinking will end up poorly for everybody in the end!
- Give yourself a 5% cushion. It never hurts to be over prepared!
- Prioritize non-negotiables before variables.
- Assign accounting codes to your expenses. This makes things easier to track.
- Align and reconcile budgeted expenses with your financial statements.
- Break out expenses and set up your budget by program.
- Allocate indirect costs like salaries, rent, operations, etc., to your programs.
- Your budget should always match your cash at the end of each month so you can ensure non-negotiables and salaries are covered.
It’s important to share the overhead myth with your team and supporters. Remember, it’s all about focusing on your Return on Investment versus total cost. When you’re ready to build out your budget, use a template to help, along with the tips above so that you have a smooth process. It’s also helpful to identify one area to invest back into your organization to help grow your mission each and every year.
Truth be told, this is a ton of information. Luckily, you don’t have to navigate the world of nonprofit budgeting alone. Download our cheat sheet to discover 4 areas to invest in for your organization to move the needle. It’s time to make the most impact possible!