Inyathelo FD Soraya Joonas’s budgeting tips for resilient non-profit organisations
Sound financial management helps to ensure the survival and resilience of an organisation, says Soraya.
Most leaders and staff of non-profit organisations (NPOs) are currently involved in planning their budgets for 2022. Many lack financial skills, however, and it’s no easy task to forecast costs and allocate resources in light of the lingering impact of Covid.
According to the Department of Social Development website, there are currently more than 250,000 South African NPOs on its national register. However, the accuracy of this total is unclear as there are many unregistered NPOs, and possibly inactive ones. The pandemic has also led to both the closure of some organisations, and the establishment of new NPOs.
Sound financial management, which includes budgeting, helps to ensure that an organisation not only survives, but is resilient and becomes sustainable in the future and can deliver on programmes and projects.
Your budget must be aligned with your organisation’s strategy and operational plan to ensure that you meet your objectives. This budget should be a principled document that translates your strategy into financial terms, with an approach that encompasses your organisational values. It’s useful to start with your organisational budget and various line items that make up your expenses and put down what you need versus what you have, so that you can determine what the shortfalls are.
There are two sides to the budgeting equation: Income and expenses. On the expenses side, a fundamental lesson of NPO budgeting is to differentiate between core costs and programme costs. These require two types of budgeting focus, to be managed separately and then integrated as a complementary whole.
These are basic expenses (also termed indirect costs) that an NPO must meet in order to function. It is the cost of ‘keeping the engine room running’ or ‘keeping the shop lights on’. Examples include non-programme staff salaries and training, furniture and equipment, rent, electricity, IT hardware, software and internet access, insurance, security, marketing and infrastructure.
Depending on the organisation, some NPOs separate out their administrative costs. These include the costs of governance, reporting, tracking, bookkeeping, auditing, banking, compliance and legal advice. Many donors stipulate a set percentage for indirect and/or administrative costs.
It is important for your organisation to work out the line-by-line actual costs as you may find that these percentages often do not cover financial requirements fully.
Other costs and equity budgeting
Comprehensive budgeting also includes budgeting for a nurturing environment, whether it be staff wellness, market-related salaries, diversity, equity and inclusion. “It involves those resources needed to nurture your organisation and governance structures and policies which have a direct impact on the delivery of programme work and sustainability of the organisation.”
In addition to their core operations, organisations’ individual programmes or projects each require their own budgets. A soup kitchen programme, for example, may need a dedicated programme co-ordinator, cooking equipment, raw ingredients, a vehicle and fuel.
A basic premise is that every project must not only cover its own programme costs, but also contribute to the core costs of running the organisation as a whole. Adding a portion of these core costs to a programme proposal budget can make the latter look very high. This is, however, a true reflection of what an organisation must budget for in order to run a programme.
Prior to the pandemic, some funders were unwilling to fund core operational costs, or willing to fund only a very basic percentage. In lockdown, however, many gave permission for NPOs to use some of their existing programme grants to cover core costs.
There is now a greater understanding that the mission and infrastructure of a non-profit organisation is its powerhouse and that without this, programmes would have no home from which to launch, nor longevity towards impact and systemic change.
Donors are looking to partner with sustainable entities and the seeds of this sustainability lie with budgeting and funding comprehensively, says Joonas.
We hope that funders continue on this trajectory and adopt this as one of the lessons learned during Covid-19 and continue to allocate towards mission funding. This essentially means ensuring adequate core costs and infrastructure are covered, to contribute to the ability of an organisation to house programmes as they ebb and flow.
On the income side of the budgeting equation it is important to consider the following:
Diverse funding sources
It’s good practice to have support from a range of donors such as individuals and companies, and both local and international foundations. It is also important to have a mix of multi-year funding.
While this promises greater financial stability, and less dependency on one or a few donors, keep in mind that donors require stewardship which involves relationship management, meetings and reports. Aim for a balance between sufficient donors to ensure financial viability, and being spread too thin to be able to manage donor accountability properly.
NPOs will also be more sustainable if they can establish diverse income streams, including income generation activities to provide some form of relief from donor dependency.
If an organisation requires funds from several donors to do its work, it must put systems in place to track and report on spending for each donor. This is called a chart of accounts or fund accounting.
This can be tricky as donors’ own budget formats may vary, and there may also be excess funds available for some line items and too little for others.
To avoid confusion, explain all costing, negotiate changes in line items, and use budget notes for clarity. It helps to have real time accounting and to allocate your spending at the very least on a monthly basis, so that you have a financial snapshot at any given time.
Income generation and undesignated funds
It is increasingly essential for non-profit organisations to budget for additional income known as unrestricted, undesignated or general purpose funding. This can be used for any organisational expenses, or even budget shortfalls. Despite this freedom, it is important to keep to the same high standards in fund management and reporting in order to maintain trust.
Financial sustainability and reserves
Non-profits that have been resilient throughout the pandemic and sustainable into the future have a common feature; they have healthy reserves. The pandemic therefore has left no non-profit unconvinced of the need for reserves and having a buffer for uncertain circumstances. This should ideally cover expenses for six to nine months.
Prepare for this with comprehensive budgeting, instead of using any surplus or undesignated funding to plug shortfall holes. Undesignated funding through additional income generation activities – be they consulting, selling goods and services, rental, or other initiatives – can be earmarked to start saving for reserves.
Although this may seem daunting, the principle of starting small and saving a monthly amount in an interest-bearing account begins to grow an awareness and discipline of focusing on financial sustainability and safeguarding funds for uncertain times.
We have learned that monitoring our cash flow in line with budget requirements is essential, and trying to assess different scenarios when budgeting also helps with planning and risk mitigation.
It is important that this is a team effort engaging the finance department, leadership and programme staff; and that organisational budgets and programme budgets integrate with the overall strategy of the organisation. If resources are to be mobilised to meet shortfalls, there must be a strong case for doing so. It must be shown that this is required to deliver on the mission.
NPO staff should always keep in mind that they manage and spend donors’ money on behalf of the beneficiaries or communities that they serve, says Joonas. This is a great responsibility and the CEO, financial manager and board members need to budget carefully and work closely to ensure sufficient funds for the coming year.
The budget also needs to be sufficiently flexible to adapt to changing circumstances, a lesson that has been made abundantly clear in the pandemic.
Sometimes we question funding trends, but we also need to be able to clearly articulate in financial terms what we need and why.