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Budgeting

Do you work for one of the many organizations that struggle with setting realistic budgets each year? Does your organization calculate expenses and then work backwards when it comes to estimating fundraising income – the “fill the gap” model?

If so, you are in the right place because it doesn’t have to be that way.

A budget is a point-in-time instrument that documents a set of assumptions. On this day, we believe our income and expenses will be $X for the Y fiscal year. All too often, the assumptions are based on goals, or even stretch goals (we like to call these the rainbow and unicorn budgets), rather than actual data and historical trends (we like to call these our best friends).

To be successful and advance the mission of your arts organization, income goals must be created based on reality, not dreams. This distinction is important and must be made with data during the budgeting process because big decisions, often with human resource implications, are made based on fundraising goals so the figures must be accurate and real.

How is this actually done?

All fundraising goals should be determined with two data points: donor retention rate and average gift size. If your organization does not have this data already, then this is the first thing you must address. We will go so far as to say you should do nothing else the rest of the day or week until you are confident with donor retention and average gift data.

No organization maintains 100% donor loyalty. None. Donors move, die, lose interest in your work, and sometimes it’s as simple as they forget to give (maybe you didn’t ask). The reality is that your mix of donors will change from year to year but there should be a steady base upon which you renew gifts. Assuming that you will have 100% renewal is setting yourself up for frustration and failure.

For example, if Organization A raises $40,000 in year one and wants to raise $50,000 in year two, it is not a growth of $10,000 in new money; rather, it is a growth of $10,000 plus the amount lost in donor attrition.

  • With a 90% donor retention rate, Organization A needs to raise $14,000 in new money.
  • With a 60% retention rate, it needs to raise $26,000 in new money.
  • With a 40% retention rate, it needs to raise $34,000 in new money.

Ok then, what does that mean in terms of number of donors?  That’s where average gift comes in.

If we need to raise $26,000 in new money that means we need to find 26 $1,000 donors or 260 $100 donors or… The number of donors needed varies based on what your average gift is and it’s normal that new donors give at lesser rates than renewing donors. If your renewing donor average gift is $250, it is reasonable to estimate that new donor average gift will be $150, which means you need a lot more new donors than the ones you have lost in order to reach your goal.

Creating realistic budgets based on actual giving history and probabilities creates a foundation for success because everyone understands the math behind the numbers. These types of budgets create great reports too because development directors can track and measure increases or reductions in retention and average gift, so your mid-year or quarterly forecasting is a lot less intimidating.

Many arts organizations have a July 1 fiscal year start and now is the perfect time to begin thinking about budgeting forward by projecting what is achievable and reasonable based on actual data.

http://www.oac.ohio.gov/News-Events/ArtsOhio-Blog/PostId/115/budget-data-solid-foundation

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