The Art of Reforecasting
Making Your Budget the Backbone of Your Nonprofit - Part 6
Navigating uncertainty is something all nonprofit leaders face, with one of the most challenging circumstances being the unanticipated loss of funding. Our case study organization, Help for Homeless Youth (HHY), just received distressing news.
One of its larger funders, Fair Weather Foundation, has just responded that due to circumstances beyond their control, they can only provide $135,000 this year and not the full amount of $185,000 that HHY originally requested. Sound familiar?
This piece of bad news represents about 7% of HHY’s annual operating budget of $740,000. In our last blog post, we said that you really should not change your budget after it is approved by the board at the beginning of the fiscal year. So, what should Jordan Johnson, the Executive Director of HHY, do?
When to reforecast the budget
Because this is a large and unexpected change no matter where she is in the year, she will want to reforecast her budget. As most of you know, once the annual budget is approved by the board it should be monitored throughout the year. Many organizations produce monthly (or quarterly) budget-versus-actual reports, showing major line items and the variance between budget and year-to-date results. In addition to producing budget vs. actual reports, your organization should make a habit of periodically reforecasting the budget to get a better idea of where you will end the year. Similar to landing a plane, we want to use the tools and resources available to us to successfully “land” our budget. We don’t want any surprises, nor do we want to land in a ditch somewhere.
The reforecasting process involves creating a separate, revised budget that uses year-to-date results as well as management's best estimate for the remaining months of the fiscal year. Note, this does not mean you need to create and work from a new budget spreadsheet. As you can see below, Jordan inserted a “Reforecast” column in her existing Excel budget spreadsheet. In this column, Jordan will record the amount of revenue and expenses estimated to be incurred by the end of the year so that she can take a pulse at different points during the year to see where HHY may end up, either with an operating surplus or deficit. She can do this quarterly or monthly, depending on how uncertain she feels at different points during the year. Once she has a forecast of where she thinks she will end the year, she can then begin to have data-driven conversations with the board as to how HHY can make up lost ground.
What else should I adjust when reforecasting my budget?
When you’re reforecasting, it’s good to take stock of your whole budget and make adjustments based on whatever insights you have about various business development efforts.
For instance, if you follow along in our sample spreadsheet below, you’ll see that Jordan has made some adjustments. On the revenue side, she recorded:
- the $50,000 reduction in the Fair Weather Foundation grant, and
- a $5,000 decrease in the Make It Rain Corporation grant based on additional knowledge she has gleaned from that funder.
In an effort to stem these losses, Jordan has committed to:
- be more proactive on the “to be raised” area and commit to finding an extra $10,000, and
- make a special appeal to the board to raise an additional $1,000 from board members and $2,000 from friends of the board.
Likewise, on expenses, she is not ready to touch salaries or most of the program expenses. However, she does believe that HHY could reduce:
- program consultants by $5,000,
- the hospitality expense by $5,000,
- the outside professional consultants by $5,000, and
- office supplies by $600.
Jordan was tempted to cut fundraising expenses but knows that she is increasing contributed revenue by an extra $13,000. Therefore, she would like to keep this expense intact.
She has made up some ground and is projecting a $14,067 surplus before non-operating/one-time items (i.e., below-the-line items). However, she is still showing a small $2,933 deficit after non-operating/below-the-line activity (see graphic below). She really wants to keep her commitment to building reserves this year, and so she recognizes she still has a little bit more work to do. In addition, she knows that with any more bad news, she may have to re-examine program expenses and/or salaries. She will be communicating this to both board and staff.
That brings us to our last and final topic on budgeting: communication.
Next up on December 21: Communicating Your Finances