If, When and How Nonprofits Should Consider Reforecasting their Budgets
COVID-19 has challenged the nonprofit sector in unprecedented ways. Some organizations—for example, health and human services organizations—have been responding to sharp increases in demand as they serve on the front lines in their communities. At the same time, these and many other organizations have been struggling to remain financially viable amid the current economic volatility.
Despite these hurdles, the pandemic has inspired many nonprofits to reflect on what’s working well for their organizations and what could be working better. Budgeting is no exception.
Historically, many organizations have relied on static budgets that are predetermined ahead of each fiscal year. While budgets like this can be a good tool for some institutions, they can become burdensome in times of change.
The business landscape is constantly evolving. While not every change will be as disruptive as the pandemic, it’s still important for nonprofits to consider more flexible budgeting techniques, whether it means looking into reforecasting or implementing a rolling budget.
Reforecasting involves looking holistically at a previously determined budget and creating a fully revised version that takes into account new facts or circumstances.
Organizations should consider reforecasting their budgets when a major change that could affect revenue drivers takes place or is anticipated to take place, such as winning or losing a major contract. It’s also important for organizations to think about reforecasting if trends show that their original budget is inaccurate or if significant variances between actual and budgeted amounts start to recur.
Whether organizations operate with a zero-based budget (a budget built from scratch) or a budget based on historical trends (a budget that adjusts revenues and expenses based on projected growth or shrinkage), a good first step when reforecasting is to determine which costs or revenues are variable. From there, organizations should consider the impact potential significant events could have on these factors. While fixed costs aren’t usually subject to change, monumental occurrences like COVID-19 may result in adjustments to traditionally stable expenses like payroll or rent as well.
Rolling budgets operate like reforecasts, except they have set times when they’re meant to be adjusted and don’t rely on trigger events. A common example of how a rolling budget works is when an organization budgets four quarters ahead, meaning that each quarter, they update the budgets for the subsequent three and add a new fourth.
Selecting a Budgeting Method
The best budgeting method for a given organization depends on many factors, including its unique attributes.
Small organizations that see relatively minor annual change might consider a static budget, especially if they’re driven by grants that won’t fluctuate once received. That said, these organizations should still routinely compare their actual results to their static budget to ensure that they’re staying on track.
Organizations in more volatile situations—where their drivers are always shifting and their strategy is constantly evolving—should consider rolling budgets. If they reach an inflection point outside of their typical updating cadence, they should still consider reforecasting as necessary.
Whether organizations use a rolling budget or not, they may find budgeting software useful, especially if they have multiple revenue streams with different corresponding variable costs. Software that allows organizations to model different budget scenarios can help organizations predict the impact certain events could have on their finances.
Though it goes without saying, it’s critical for organizations to carefully and thoughtfully prepare their original budgets, no matter which model they choose. As they consider how to best operate in a new world order—from thinking about if and how to safely return to the office to reevaluating their financial positions—organizations should make budgeting a part of the conversation. To learn more, read our recent article “Reforecasting Your Budget
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