Budgeting for Sustainability
“How are you making it?” This was the question posed to me by a colleague and nonprofit leader during COVID. My reply was simple, “I’m looking to grow and expand our [Entrenuity’s] reach.” My colleague went on to explain that much of his programming revenue was beginning to slow down. Programs such as tutoring, mentoring and summer camps—his primary revenue drivers—were being put on hold, as COVID19 social-distancing guidelines severely limited his cash flow. Cash is king any business, but especially in nonprofits. Without the revenue for his programs, his organization’s very existence is in question. The mindset of simply making it, is simply not enough.
Many in the nonprofit industry build organizations on programs that are not profitable. I know it may seem sacrilegious to speak in terms of nonprofits generating “profits,” but a mindset shift is needed for nonprofits to create sustainability, especially as donations to nonprofits have been decreasing, even prior to COVID19¹. Most nonprofits that are service based, create programs to solve a problem. To operate the program, they write a proposal, create a budget, and then seek a funding source to fund/underwrite their program. Often after many laborious hours of searching for a funder(s) and submitting proposals, they either:
a: find a donor(s) to launch the program,
b: do not launch the program at all, or
c: launch the program regardless of whether the funding has been secured.
Simply making it, is simply not enough.
As many in the nonprofit space know, often nonprofits elect option c—since the need is so compelling and we hope to identify donors while operating the program. This is a classic nonprofit mistake that strains the organization’s financial, human, and operational resources. This model results in less than stellar outcomes and programs that are subpar in execution and delivery—and consumes staff resources. It can feel like “making bricks without straw.” I believe there is a better way to improve outcomes: Programming Markup Creates Organizational Sustainability.
When building a program budget, staff salaries is typically the highest expense. Most nonprofits do not build their programmatic budget models to account for this expense beyond the staff’s hourly rate. Even if a staff person is on salary, it is necessary to determine their hourly rate. However, there are expenses in addition to that rate the organization must account for, such as overhead and administrative costs. Not factoring these expenses into programmatic budgets leaves organizations vulnerable to being under-resourced and leads to instability.
To illustrate this principle: consider operating an after-school mentoring class with one staff person assigned to the program. The hourly rate for the staff member providing the direct instruction is $20.00 per hour and the program requires 100 hours of direct services. By multiplying the hourly rate of $20.00 per hour by the 100 hours of direct instruction, the direct instruction cost is $2,000. However, to reflect the true cost, you must include more than the staff person’s hourly rate in your budget, as the actual cost to the organization can include payroll taxes, benefits, administrative and overhead expenses. By budgeting the staff person’s hourly rate plus at least a 35% increase to account for the other expenses, the hourly instruction cost is $27.00 per hour. Therefore, in the program budget, the staffing budget should increase from $2,000 to $2,700. Now there is an added $700 to cover costs. Factoring in the added expenses helps build sustainability.
By managing expenses and keeping costs down, the added funds earned from a well-executed program can be used to help the organization meet expenses, create sustainability, and build reserves, along with rewarding staff with annual bonuses for well planned and executed programs. Under budgeting lessens the likelihood of success and organizational stability.
¹Paul Clolery News September 5, and Paul Clolery. “Fundraising, Number of Donors Plunging.” The NonProfit Times, www.thenonprofittimes.com/fundraising/fundraising-number-of-donors-plunging/.