Nonprofits are some of the most rewarding and inspiring places to work. As described by the National Council of Nonprofits: “Charitable nonprofits embody the best of America. They provide a way for people to work together for the common good, transforming shared beliefs and hopes into action.” However, working toward the common good demands sound budgeting strategies. For some nonprofits, this means reevaluating whether they are budgeting appropriately for mission sustainability.
For example, a typical budgeting practice for nonprofits and their financial supporters is to price nonprofit program work at its cost. Nonprofits commonly value their services, campaigns, projects and programs by developing a line-item budget. This traditional practice of presenting a line-item budget to a potential funder is the equivalent of pricing the work at cost. It reduces the value of the work—and the important mission it represents—to time and materials. By representing a nonprofit financial story this way, there is a risk of not capturing the true costs associated with the work.
When we budget by line item, we risk being too timid and resigning ourselves to include only those items we think appeal to our funders. More often than not, the resulting budget understates the true costs of running the program, service or campaign. Many organizations forget to (or choose not to) allocate the cost of essential administrative and fundraising infrastructure to their programs, leaving alarming funding gaps. If the organization hopes to survive using this pricing method, it must supplement each project with funds from general operating reserves, general support funds or other income.
Enhancing Line-Item Budgets
Today’s philanthropic and government funding climate means line-item budgets are not going away soon. However, nonprofits can take actions to improve their effectiveness and sustainability. The way to make a line-item budget viable is to build in a surplus. It requires enlightened funders to provide more money than the stated cost of the program or service. Sharing a compelling narrative about what the surplus will mean for the success, stability or growth of the organization’s mission is one way to encourage donors to fund a surplus.
A second way to display a future-focused financial story is to move the surplus above the bottom line. You can tell a more explicit story by adding line items beyond a “time and materials” mentality. Funding the future includes various types of reserves (operating, opportunity, capital projects, etc.). If you envision your nonprofit continuing to grow, it makes sense to plan for expansion. That means you could incorporate line items that accrue for additional project management, infrastructure investment and staffing needed for new programs. To ensure an organization thrives, it’s important to reset the “break-even mindset.” The future requires reserves—and to create reserves requires more funding than the amount you spend on present needs.
Shift to Deliverable-Based Budgets
The deliverable-based budget method requires pricing work above cost. Instead of providing a line-item budget, this method presents a budget amount based on the value (priced above cost) of certain mission-related deliverables. The mission deliverables could take any number of forms—a service, product, outcome, event or organizational change.
Presenting a request for funding tied to deliverables rather than cost has a powerful effect: it transforms the exchange between the funder and the nonprofit. Since value is implicitly included in the price, the donor must decide if the price is justified by the value. While potential contributors commonly compare nonprofits to each other when deciding which organizations to support, nonprofits can take the lead in elevating the comparison to a question of value—rather than a question of cost.
The Value of Communication
Though communicating value is a difficult task, nonprofits should not shy away from claiming value above cost and putting a fair price on that value. While it is difficult to price stable housing, meaningful employment, healthy ecosystems and harmonious communities, it’s nearly impossible to sustain any of these efforts if you allow them to be undervalued and underpriced. Pricing nonprofit mission and program work requires a change in mindset by nonprofits and their supporters to not only quantify value, but also frame the message around it.
How We Can Help
Nonprofit organizations, due to their nature, already face incredible hurdles for sustaining success. At CLA, our team can help you create budgeting strategies that make the most sense for your organization. If properly executed, such strategies can unlock critical funding for your organization, allowing it to achieve its missions year after year.PM
Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor. The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment or tax advice or opinion provided by CliftonLarsonAllen LLP (CliftonLarsonAllen) to the reader. For more information, visit CLAconnect.com.