Over the next several weeks, we will discuss different elements of nonprofits budgets. Our goal is to build capacity because we often receive questions from board and staff members that speak to the need for a broader understanding.
Regardless of when your fiscal year begins, a primary question to ask is, what drives your organization’s economic engine? Your board and senior leadership team should know this answer. For instance:
- If you are a school, tuition may drive your economic engine.
- For health organizations, it may be third-party reimbursements from insurance providers.
- For performing arts organizations, it may be subscribers and ticket buyers.
- For social service agencies, it may be government contracts.
- For faith-based organizations, it may be philanthropy.
This week, we’ll look at these dollars, which are either earned or contributed.
Earned Income: Any fee for service (program and registration fees), contract for service, third party reimbursement, interest, and/or investment income.
Contributed Income: Individual, corporate, and foundation contributions or grants, in-kind gifts, and/or any government grants that are not contracts for service.
Every organization has a mix of earned and contributed income. The ratio between the two is a key performance indicator.
For some, a healthy budget mix may be 70% earned and 30% contributed. For others, it may be the reverse. There is no one-size-fits-all ratio that can be applied across all nonprofits, but extremes on one end or the other is putting a lot of proverbial eggs in one’s income basket.
When the budget planning process begins for your organization, start with the income ratio for the last fiscal year. Are you satisfied with the ratio? Does it exemplify a healthy budget mix? Do you foresee growth opportunities in earned or contributed income, and if so, what ratio do you project for next fiscal year?
Once the ratio is determined, then each line item of earned and contributed income should be broken down based on last fiscal year’s data.
If we use a private school example:
- How many families paid tuition? How many will renew for the coming school year and at what tuition rate?
- How many families are graduating and how many new families will enter? Will those new families offset departing and graduating families?
- How many families will be offered scholarships? How many families will have tuition vouchers or other aid from the state?
- What can be predicted about interest, investment income, and draws from endowment funds?
- How many donors supported the mission last year? How many will renew again and at what average gift? How many new donors will support the mission, and will those new gifts offset the donors lost through attrition?
- How many grants were received last year? Were they program or project specific or general operating? Have we spent down the restricted funds received last year and what probability exists to secure grants next year?
- How many in-kind gifts were received and what value can be expected next year?
While this may seem like an endless list of questions, we implore nonprofit leaders to ask them. Too often, we see diligent analysis on the earned income side but “fill the gap” numbers on the contributed income side. These “fill the gap” budget practices is a contributor to development director burn out and turnover. The practice essentially says, “We did the math on earned income and expense, but don’t understand fundraising, so just go raise it.”
Our recent articles on philanthropy and fundraising touch on this topic. And it bears repeating because it’s the only way to fully document assumptions, provide transparency to the board, and create a roadmap for building a development plan.
Article by: Kerri Laubenthal Mollard, Founder & CEO