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.
Last week, we looked at earned and contributed income. Today we examine expenses.
Most organizations that we’ve worked with have a strong sense of expense. Their finance teams keep a watchful eye on the dollars going out because they operate on such thin margins.
There are other instances, though, where finance teams build expense budgets in a silo, and then tell the development team to “go raise $X.” When the fundraising staff can’t meet the unrealistic expectations handed down to them, the organization is faced with cutting expenses, operating at a deficit, or both. Hence, why I believe so many development directors change jobs before they complete two fiscal years with the same organization.
Nonprofits would be served well to budget better on both sides of the ledger. Here are some expense items to assess.
This is often the first line item to get cut. No money for professional organization dues, conference attendance/travel, educational luncheons, webinars, or industry periodicals. It saddens me when I hear a chief executive or other senior leader say that they have not attended a conference in a decade or that they don’t even consider joining their field’s association because they would never be able to attend programs. We cannot starve our nonprofit leaders of knowledge and professional support while at the same time expect them to be innovative in their solutions to our community’s greatest needs.
Health insurance is a major expense in any budget and these costs keep increasing. Joining a Chamber of Commerce can greatly reduce health insurance costs. Does your policy include vision and dental? If not, consider adding them because they are a minimal cost for employers but can have a huge impact on employees. Take a look at your other insurance policies as well. What does your liability insurance policy cover and what level of protection does it give the organization? Is your governing board protected with directors and officers liability insurance (D&O insurance)? Do a complete audit of all policies to make sure the organization and its employees have the assurance needed.
The largest line item for most nonprofit budgets is human resources. A good way to measure if your compensation levels are in line with industry standards is to reference a salary survey. The Ohio Association of Nonprofit Organizations (OANO) publishes one every year as a guide for boards and chief executives. Your organization should also consider giving two or three percent raises annually to keep up with the cost of living. If not, your employees lose their buying power and earn less over time. Use the Social Security Administration as a guide to determine cost of living. If your employees are doing well and you want to give merit increases, be aware that it should be above and beyond cost of living.
Direct Costs vs. Indirect Cost Allocation
When it’s time to build a program budget, many program managers only consider the direct expense of the people or supplies needed to operate the program. However, there are indirect expenses that also need to be re-cooped. Determining how much to allocate to administration and overhead is critical. When organizations do their diligence and get it right, they raise more money and have a more stable bottom line.
While depreciation is a non-cash expense, we see the rewards when organizations fund their depreciation line items. For instance, an organization set aside the dollars over time for a full parking lot replacement of new asphalt and striping. When the time came to do the work, the money was available. There was no crisis. There was no urgent appeal or no pressure on any of the other programs and services. They simply contracted the work and paid the bill. While this may seem easier said than done, it is imperative that organizations have the discipline to budget for future capital replacements and repairs.
Budgets are a reflection of priorities. What priorities does your expense budget illustrate?
Article by: Kerri Laubenthal Mollard, Founder & CEO