Outlook for the new fiscal year for non-profit organizations

With a new year on the horizon and a lot of uncertainty about income and expenses in 2022, nonprofit business owners and nonprofit executives alike are thinking about the budget. Here is a repetition of this cutting edge topic from Mark Payne, CPA providing wise advice based on real life examples and years of experience.

“That’s not in the budget.”

I’m sure we’ve all heard this before in our careers. But what on earth does that mean? Personally, I believe it is used to keep an employee from going spending crazy and to keep a nonprofit on a specific spending schedule. I often get calls from nonprofits that live in the world of “zero income, less expenses”.

Now you are probably wondering about this statement. How many nonprofits actually end up with net income for the year with zero? I don’t think so. While not impossible, it is very unlikely that any nonprofit would have a net annual income of zero. In fact, after nearly 30 years of auditing, I’ve never seen a nonprofit with a net income of zero.

Budgeting to increase wealth

The board and management should plan for a net income increase each year. If a nonprofit doesn’t make money but loses it every year, at some point the organization will stop and we will all suffer.

The public tends to believe that nonprofits shouldn’t be making money. However, just like a for-profit company, these organizations need to do this in the long run. The main difference is that the nonprofit generally pays no income tax and has no shareholders (as a for-profit company would do).

Here are a few tips for budgeting every year. The annual budget of a nonprofit organization should be at a grant and overall level. It is expected that most grants will be a reimbursement of costs and therefore should be breakeven for the grant. That is a zero net income for the grant.

However, the overall budget of a non-profit organization should show a net increase in net assets (net income). This excess is needed to ensure that if the organization’s reimbursement grants are exceeded, other means are available to cover the deficiency.

Five budget questions answered

Over the past 30 years I have been asked the following questions about budgets.

1. Can a budget be changed? Damn yeah A budget is a document that should likely be changed at least once a year. Things happen that are beyond our control and adjustments may need to be made.

2. Should I add a hiring line item to my budget? I’ve seen this with and without the line item. The real takeaway here is that depreciation is one of those non-cash events that decreases your net income but has no effect on actual money.

3. Do I plan the principal and interest for a note that is payable in the budget? Technically, interest only should hit your budget as the bulk of it reduces cash but doesn’t affect net income.

4. Do I create the budget on a cash basis or on a provision basis? Most of our customers think in terms of cash – so personally I would make cash. A financial statement or grant budget should not be confused with a cash flow forecast (e.g. when you expect to collect funds for grants and actually pay your monthly bills).

5. Who should vote on the budget? The whiteboard. The buck stops with the board.

Finally, years ago I ran into a CFO who was hiding a money theft by increasing household expenses and income by the same amount. These inflated expenses so that the theft did not exceed budgeted expenses. So make sure that the budget you are looking at is actually the one approved by the board.

Mark Payne is a CPA and a partner in James Moore & Company, CPAs. Contact him at Mark.Payne@JMCo.com. Not for profit notices are prepared by Alyce Lee Stansbury, CFRE, President of Stansbury Consulting. Send your feedback and questions to notesonnonprofits@gmail.com.

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