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Best Practices for 2021 Budgeting for Not-For-Profits

With everything surrounding COVID-19 and this past year, budgeting for 2021 will prove to be a challenge for many not-for-profits. Some not-for-profits had to decrease their services and staffing. Others have redirected their mission to serve their community’s more pressing needs. Many fundraising events were canceled this year in an effort to adhere to social distancing guidelines. This, combined with the uncertainty surrounding this year for donors, caused many organizations to observe a significant decrease in donations.

The budgeting process for not-for-profits is often already difficult. However, this year will make it even harder for organizations to try to forecast their income and expenses for 2021. As we head into the next year with uncertainty, not-for-profit organizations should take the time now to consider what their income and expenses will likely be. The 2021 budget should be redone if needed with this consideration in mind.

Things to Consider

When reanalyzing your 2021 budget, you should consider the following factors:

  • This year has been nothing short of unpredictable. However, you can look back at historical data for the past five years for spending and revenue trends. This can help determine some baseline figures for next year.
  • Start with a review of your current operations. Determine if your current operations are expected to continue in 2021. Then, determine if the associated staffing levels will be maintained.
  • Did your organization obtain the Paycheck Protection Program (PPP) loan for payroll and operating expenses? If so, remember to include any unspent loan amounts as budgeted revenue to the extent that the loan is expected to be forgiven.
  • Personnel costs are usually the largest expense item in a budget. This includes salaries and benefits. Did your organization have to furlough or lay off staff in 2020? If so, consider whether some or all of those employees will be hired back.
  • Be conservative with your expense budget and plan for the worst-case scenario. As with the unpredictability we have witnessed this past year, we have no idea what’s to come or how quickly things can change.
  • Review your 2020 actual expenses so far and determine which items will continue, which will end, and which may increase. Be sure to factor in any services that may have been cut or decreased this year, as they could resume in 2021.
  • Plan to monitor your cash position carefully throughout the year. Establish a point upfront when you may need to dip into unrestricted reserves to cover operating expenses.
  • Have a meeting with your fundraising team to discuss sources of revenue and note any changes that occurred in 2020. Look separately at grants, large donations, revenue from fundraising events, and other sources of income. Also, note which gifts may have restrictions that limit their availability to cover operations.
  • Separate revenue and committed gifts from those sources that have greater uncertainty. You may be able to reinstate some fundraising activities but not all. Consult your Certified Public Accountant (CPA) firm to help you perform a sensitivity analysis on uncommitted revenue to ascertain the likelihood of obtaining these funds.
  • Did your organization have to defer special events in 2020? If so, factor in any deferred sponsorship funds and ticket sales that will be honored at rescheduled events in 2021.
  • During this process, it may be tempting to cut capital projects to balance your budget. An example of this would be the construction of a new building. Before cutting, you should think about the long-term ramifications of doing so. Consider trying to obtain special grants or matching donations to fund these projects.
  • Some organizations may have redirected their mission. If your organization did this, you may need to allocate funds for marketing and fundraising. With this, you can communicate the new direction to the community, donors, partners, and other constituents.
  • Consider creating a few different budget scenarios to review with your board. You can assign probabilities to these scenarios to account for the likelihood of revenue shortfalls and expense increases.
  • You may want to consider investing in new software to help you easily reforecast your budget throughout the year. This will enable you and your board to react quickly to sudden changes in revenue and expenses.
  • Developing and following a sound annual budgeting process is a critical responsibility. Not-for-profit management teams and boards should do this. Your CPA firm can provide insight and advice for planning your 2021 budget during this challenging time.

Another thing to consider this year is the new Revenue Recognition Standard. If this was optionally delayed in the previous year, it will be in effect. Be on the lookout for a blog clarifying that standard soon!

For questions about not-for-profit budgeting, always consult a Certified Public Accountant. Submitted by Allison Harrell, Shareholder, Assurance Services, and Not-for-Profit team leader. Thomas Howell Ferguson P.A. CPAs, (850) 668-8100.

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