In the second article of our scenario planning series, we offer ideas for how nonprofits can approach financial planning for 2021.
- A perfectly balanced budget should never be the goal, particularly in these circumstances.
- For 2021, utilize both cash basis and accrual basis budgeting, if possible.
- Create additional flexibility with an incremental budgeting approach.
Need help planning for 2021?
During COVID-19, nonprofits like yours continue to work relentlessly to serve clients and meet missions in situations that were previously unthinkable. With the heightened stress, uncertainty, and now, inability to follow your well-honed budget process, you may find it hard to make financial planning a high priority.
In the second article of our series focused on scenario planning, we turn our attention to nonprofits, and we review ideas, tips, and tricks for how to approach financial planning going into 2021.
Budget, forecast, and plan for 2021
In some ways, nonprofits are better prepared to manage both uncertain financial situations and heavily regulated funding when compared to our for-profit peers. When the Paycheck Protection Program (PPP) rolled out and recommended organizations separately track PPP revenues and forgivable expenses, many businesses had to rebuild their accounting systems. Nonprofit accountants on the other hand require this level of tracking and reporting for nearly all of our funding sources.
In addition to the ideas outlined in our recent article, “Financial Planning in the Time of COVID-19,” consider specific nonprofit strategies as you go begin to budget and forecast.
Balanced budgets: Don’t make that your goal
You might ask yourself, “Don’t we want to balance our budget? Isn’t that the point?” The concept here is that a good budget — one that truly reflects reasonable assumptions about what it will cost to run your organization and what revenues you will be able to secure — will never balance to the exact penny. And if it does, it means there is a plug number somewhere.
The only time you should have a perfectly balanced budget is if you have an expense line that reflects a “contribution to reserves” that happens to be the plug. That represents the intent to build your reserves for rainy days or future initiatives, which is usually a good idea.
Going into 2021, there are many unknowns for nonprofits, including:
- What will happen to philanthropy? Will the surge of giving over the summer continue or have donors reversed course? Will the government provide more incentives for taxpayers to contribute?
- How will the decreases in state and local tax revenues impact grants and contracts from those entities, particularly if we are at the end of a multi-year agreement or on an annual renewal?
- Will we be able to run our programs that earn revenue and sustain our organization?
- What will be the costs associated with canceled events? Will our vendors and supporters be as flexible with us in 2021 as they were in 2020?
For all of those reasons and more, consider planning out a few scenarios for the year — with the realistic expectation that none of them will permit your organization to break even.
You may need to dip into the reserves you worked so hard to build. Or maybe the changes you enact will allow you to put a little more away in anticipation of a longer impact from the pandemic. Either way, use utter transparency in your budgets this year. Don’t make the readers of your budget search for a plug.
Cash basis and accrual basis budgeting: Budget for both this year
In normal times, the creation of a sound budget, one that’s reflective of realistic revenues and expenses timed by month, is an accomplishment. Such budgets can be used to understand how your organization has performed and expects to perform over the course of the fiscal year.
Often, organizations use their accrual basis budget to (quickly) make estimates that can be used to guide crucial decisions about programming and operations. In an ordinary world, using accrual basis budgets in this manner makes complete sense and can reap great benefits. But, as we all know, the world we live in today is not the normal world. While an accrual basis budget will help your organization anticipate how a future month’s Statement of Activities may look, it may not help you understand whether you have the cash to pay your bills.
If you want to utilize your budget amid the current uncertainty, a cash basis budget (or cash flow projection) will help you truly understand your cash impacts in ways that an accrual basis budget just can’t project. The cash basis budget:
- Projects when the cash will arrive, so you can make sure cash-in projections line up with cash-out projections to prevent a significant dip in your organization’s cash balance.
- Projects debt principal payments and capital expenditure outlays that you may have down the road, allowing you to pay debts on time and pursue capital projects crucial to continued success.
- Nullifies accrual basis revenue shown when a debt is forgiven (such as PPP forgiveness), helping you understand that forgiven debt does not translate to more cash in the bank.
While there isn’t a right or wrong way to arrive at both an accrual basis budget and a cash basis budget, many organizations take the accrual basis budget and layer in adjustments for cash basis accounting. This year though, with cash flow being particularly important, you may find it easiest to start with a cash basis budget and then back into your accrual basis budget.
If your budget process is inclusive of both an accrual basis budget and a cash basis budget, give yourself time for necessary conversations with team members along the way.
Incremental budgeting: Consider a more flexible approach
Accurate budgets in normal operating years can be difficult enough. Budgeting for an entire twelve-month interval amid the uncertainty of 2020 and 2021 may be practically impossible for your organization. How can management and a board potentially approve a theoretical budget when so much of your organization’s programming and fundraising may depend on how we contain a virus that currently shows no signs of slowing down?
You may consider looking at the coming fiscal year through an incremental lens, since a twelve-month budget may be based on too many unknowns. Consider the following process:
- Put together a twelve-month budget and ask the board to simply approve the Q1 portion of the budget.
- Examine the budget after two months of Q1 activity and adjust with more realistic assumptions for Q2 through Q4 as needed. This process may help mitigate some of the uncertainty your organization faces as the budget year unfolds.
Additionally, build your budget using a flexible structure, so you can change inputs and assumptions easily without having to rebuild the whole budget.
How we can help
There is no playbook for how to run your organization amidst a pandemic, social unrest, and community needs that continue to grow. CLA will continue to provide you with new tips and strategies as we work alongside more than 1,200 nonprofits as their outsourced accounting team. If you have additional questions about the topics covered today, please feel free to reach out to us.